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STUDIES  IN  HISTORY,  ECONOMICS  AND  PUBUC  LAW 

EDITED  BY  THE  FACULTY  OF  POLITICAL  SCIENCE 
OF  COLUMBIA  UNIVERSITY 

Volume  LVI]  [Number  1 

Whole  Number  137 


SPECULATION  ON  THE  NEW  YORK 
STOCK  EXCHANGE 

SEPTEMBER,  1904-MARCH.  1907 


BY 

ALGERNON  ASHBURNER  OSBORNE 

Instructor  in  Economics  and  Industry ^  University  of  Pittsburgh 


COLUMBIA    UNIVERSITY 

LONGMANS,  GREEN  &  CO.,  AGENTS 
London  :  P.  S.  King  &  Son 

I913 


FACULTY  OF  POLITICAL  SCIENCE 


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sor of  Political  Economy  and  Finance.  H.  L.  Osgood,  Ph.D.,  Professor  of  History. 
Wm.  A.  Dunning,  LL.D.,  Professor  of  History  and  Political  Philosophy.  J.  B.  Moore, 
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to  students  in  the  School  of  Political  Science. 


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SPECULATION  ON  THE  NEW  YORK  STOCK  EXCHANGE 


iEx  Hifaris 


SEYMOUR    DURST 


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Because  tl  has  heen  said 
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Avery  Architectural  and  Fine  Arts  Library 
Gift  of  Seymour  B.  Durst  Old  York  Library 


STUDIES  IN  HISTORY,  ECONOMICS  AND  PUBLIC  LAW 

EDITED  BY  THE   FACULTY  OF  POLITICAL  SCIENCE 
OF  COLUMBIA  UNIVERSITY 

Volume  LVI]  [Number  1 

Whole  Number  137 


SPECULATION  ON  THE  NEW  YORK 
STOCK  EXCHANGE 

SEPTEMBER,  1904-MARCH.  1907 


BY 

ALGERNON  ASHBURNER  OSBORNE 

Instructor  in  Economics  and  Indv^try,  University  of  Pittsburgh 


Ntw  Dcrk 
COLUMBIA    UNIVERSITY 

LONGMANS,  GREEN  &  CO.,  AGENTS 
London  :  P.  S.  King  &  Son 

I913 


Copyright,  1913 

BY 

ALGERNON  ASHBURNER  OSBORNE 


to 

THE  MEMORY 

OF 

MY  FATHER  AND    MOTHER 


Digitized  by  the  Internet  Archive 
in  2013 


http://archive.org/details/speculationonnewOOosbo 


PREFACE 

There  are,  broadly  speaking,  three  accepted  methods  of 
discussing  the  modern  stock  exchange  in  general  or  any 
single  exchange  in  particular.  One  consists  in  picturing  the 
stock  exchange  as  an  institution  which  is  indispensable  to 
the  conduct  of  present-day  business;  the  stock  exchange  is 
held  up  before  us  as  attaining  a  degree  of  success  in  per- 
forming certain  services  for  society  generally,  such  as  no 
other  human  institution  has  ever  reached.  Another  con- 
demns the  workings  of  the  New  York  Stock  Exchange 
and  denounces  everybody  actively  connected  with  it  as  a 
thief  or  a  gambler  or  both.  Still  a  third  recognizes  the  use- 
fulness of  the  stock  exchange,  while  it  deplores  evils  that 
are  incidental  to  it.  But,  because  of  the  weaknesses  of  un- 
changeable "  human  nature  ",  these  evils  are  depicted  as  in- 
eradicable or  well-nigh  so. 

The  present  monograph  is  not  an  attempt  to  achieve  mere 
originality.  The  New  York  Stock  Exchange,  in  itself,  is  not 
idealized,  those  operating  on  it  are  not  sweepingly  charac- 
terized as  either  dupes  or  knaves,  and  possible  remedies  for 
such  evils  as  were  glaringly  apparent  during  1906  and  1907, 
for  example,  are  briefly  considered,  and  are  set  forth  as 
quite  practicable.  But,  if  discussion  can  be  diverted  from 
the  well-trodden  paths  along  the  three  main  lines  indicated, 
it  seems  as  if  a  clear  recognition  of  the  evils  and  correctives 
for  them  may  result  from  discussion  with  a  new  starting- 
point.  Those  who  have  beheld  stock  speculation  from  any 
one  of  the  three  viewpoints — which  are  almost  mutually 
exclusive — appear  to  have  accomplished  little  in  the  way  of 
elucidating  the  subject  or  of  curing  the  evils. 

7]  7 


8  PREFACE  [8 

First  of  all,  it  seems  probable  that,  by  critical  analysis  of 
the  functions  of  organized  speculation,  during  a  period 
when  it  was  exceedingly  active,  we  may  discover  the  ex- 
tent to  which  such  speculation  was  a  benefit  to  society. 
Criticism  of  certain  wise  saws  applying  to  stock  specula- 
tion seems  a  necessary  first  step  in  focussing  attention  on 
the  evils  of  modern  speculation.  Accordingly  the  follow- 
ing monograph  is  largely  critical  of  certain  commonly 
accepted  dicta  regarding  speculation,  in  the  light  of  events 
briefly  related  in  the  narrative  portion  of  the  work.  Con- 
structive suggestion  is  brief.  It  cannot  be  otherwise  in  the 
present  stage  of  discussion,  where  most  minds  are  so  hazy 
on  the  significance  of  speculation.  The  criticism  is  offered, 
along  with  the  suggested  correctives,  chiefly  with  a  view 
of  revivifying  and  redirecting  discussion.  The  adoption 
of  the  suggested  remedial  measures  in  the  near  future  can- 
not perhaps  be  expected.  But  if  discussion  is  drawn  away 
from  its  conventional  courses,  a  distinct  step  in  advance  will 
be  made.  The  expectations  and  aims  just  set  forth  will 
serve  as  an  Apologia  for  this  monograph. 

To  Professor  H.  R.  Seager  for  his  valuable  and  helpful 
advice,  and  for  undertaking  the  drudgery  of  reading  the 
manuscript  in  its  crudest  stages  and  also  the  proof;  and  to 
Professor  E.  R.  A.  Seligman,  who  has  helped  in  preparing 
the  manuscript  for  publication,  the  author  wishes  to  offer 
his  heartfelt  thanks.  To  both  of  them  and  to  the  other 
members  of  the  Faculty  of  Political  Science  of  Columbia 
University,  under  whom  the  author  has  studied,  he  wishes 
to  extend  his  gratitude  for  many  illuminating  suggestions 
they  have  given  him,  often  unconsciously.  Their  collec- 
tive outlook  on  human  activity,  though  comprehended  only 
in  part  perhaps,  has  been  refreshing  and  stimulating  to  a 
degree  which  cannot  be  measured  or  expressed. 


CONTENTS 


PAGE 

Preface ...        7 

CHAPTER  I 
Introduction 11 

CHAPTER  II 

Active    Speculation :    Urgent    Investment    Demand — September- 
December,  IQ04  ...       21 

CHAPTER  III 
Changing  Conditions  of  Investment :  1905 35 

CHAPTER  IV 

Tendencies  toward  Over-Speculation:  Restricted  Powers  of  Invest- 
ment Absorption — January-June,  igo6 49 

CHAPTER  V 

Over- Speculation  and   Liquidation  on  a  Large  Scale — July,  1906- 
March,  1907 63 

CHAPTER  VI 
The  Assumed  Investment  Demand 79 

CHAPTER  VII 
Speculative  "  Anticipation  of  the  Needs  of  the  Market  " 91 

CHAPTER  VIII 

Stock   Speculation   in  1906  and  the    Succeeding  Economic    Read- 
justment    118 

CHAPTER  IX 

Summary,  General  Conclusions  and  Remedial  Measures 144 

9]  9 


10  CONTENTS  [lO 

PAGE 

APPENDIX  I 

Number  of  Shares  Sold  on  the  New  York  Stock  Exchange,  Each 
Month,  1500  to  1912  Inclusive 174 

APPENDIX  II 

Prices  of  Some  Leading  Speculative  Stocks  in  the  New  York  Stock 
Exchange,  on  the  First  of  Each  Month,  September,  1904,  to 
March,  1907,  and  on  March  29th,  1907 174 

Vita 175 


CHAPTER  I 

Introduction 

"  In  striking  contrast  to  the  .  .  .  legal  position  of  the  prin- 
cipal continental  exchanges  is  the  private  and  independent 
character  of  the  New  York  Stock  Exchange.  This  privacy 
has  been  intensified  by  the  settled  policy  of  the  Exchange  to 
keep  its  affairs  as  secret  as  possible,  to  attend  strictly  to  its 
own  business,  and  to  resent  any 'interference  from  without. 
It  has  resisted  every  effort  toward  incorporation.  That  an 
association  which  dominates  the  financial  market,  directs  the 
course  of  investment,  and  settles  the  value  of  property  for 
millions  of  people  has  for  nearly  a  century  maintained  itself 
as  a  purely  private  organization,  and  will  perhaps  continue  to 
do  so  for  another  hundred  years,  is  a  striking  example  of  the 
confidence  of  people  of  the  Anglo-Saxon  race  that,  as  fast  as 
public  wants  develop,  private  activity  will  furnish  the  best 
means  to  satisfy  them."  —  H.  C.  Emery,  Speculation  on  the 
Stock  and  Produce  Exchanges  of  the  United  States  {i8q6). 

However  people  of  the  Anglo-Saxon  race  have  relied  in 
the  past  on  private  activity  as  a  means  of  evolving  the  sys- 
tem of  selling  securities  that  will  be  most  advantageous  to 
the  parties  directly  concerned  with  the  transactions  and  to 
the  community,  public  opinion  in  recent  years  seems  to 
have  been  directed  toward  reforming  certain  defects  which 
apparently  exist  in  the  conduct  of  the  New  York  Stock 
Exchange.  Incorporation  of  the  Exchange,  in  particular, 
has  been  discussed,  both  at  Albany  and  Washington,  as  a 
method  of  rendering  the  sale  of  securities  more  amenable 
to  governmental  control.  In  order  to  examine  the  results 
III  II 


12   SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [12 

obtained  under  the  regime  of  unhampered  private  control, 
it  has  seemed  worth  while  to  consider  the  activities  on  the 
New  York  Stock  Exchange  in  a  particular  period.  The  31 
months,  from  September,  1904,  to  March,  1907,  inclusive, 
have  been  chosen  for  this  purpose,  because  of  the  sustained 
activity  of  stock  trading  —  measured  by  the  number  of 
shares  sold  each  month — which  characterized  them.  The 
degree  of  that  activity  is  indicated  in  the  following  table 
in  which  sales  for  the  31  months  chosen  are  compared  with 
those  in  the  periods  of  equal  length,  immediately  preceding 
and  following. 

MONTHLY  RECORD  OF  SHARES   SOLD   ON  THE  NEW   YORK   STOCK  EXCHANGE. 

Feb.,  iQ02-Aug.,  JQC4.  Sept.,  iq04~Mar.,  IQ07.  Apr.,  iqoy-Oct.,  iqoq. 

Maximum 26,567,743  lApr.,  1902)  38,512,548  (Jan.,  1906)  24,966,326  (Nov.,  1908) 

Minimum 4,972,804  (June,  1904)  12,576,469  (June,  1905)  9,677,494  (Nov.,  1907) 

Average 13,249,121  23,554,097  16,147,272 

The  period,  during  which  a  relatively  high  degree  of 
activity  was  maintained,  seemed  particularly  worthy  of 
study,  since  it  coincided  with  a  striking  expansion  of  gen- 
eral prosperity — both  commercial  and  industrial — in  the 
United  States  and  throughout  the  world.  This  growth  of 
prosperity,  in  degree  and  extent,  was  hardly  interrupted 
during  the  31  months  constituting  the  period  which  has 
been  selected  for  study.  But  if  we  could  plot  on  a  chart 
the  values  of  index  numbers,  showing  respectively  the  de- 
gree of  the  general  prosperity,  the  volume  of  trading  activity 
on  the  Stock  Exchange,  and  the  general  prices  of  stocks  in 
which  trading  was  active,  we  should  not  find  that  the 
three  curves  tended  to  conform  closely  with  one  another. 
As  has  been  said,  prosperity  underwent  continuous  expan- 
sion. The  monthly  volume  of  transactions  on  the  Stock 
Exchange  varied  over  a  wide  range,  extending  from  38,- 
512,548  to  12,576,469  shares.  Prices  on  the  Stock  Ex- 
change rose  very  perceptibly  at  the  beginning  of  the  period, 


13]  INTRODUCTION  13 

underwent  numerous  undulations  during  1905  with  an  up- 
ward tendency,  exhibited  a  downward  trend  with  some 
interruptions  in  1906,  and  finally,  in  the  first  three  months 
of  1907,  with  which  the  period  closed,  fell  sharply  and 
profoundly. 

The  purpose  of  taking  up  in  detail  the  activities  of  the 
New  York  Stock  Exchange  during  this  31  months'  period, 
is  to  discover  what  conclusions,  if  any,  can  be  drawn  legiti- 
mately from  a  study  of  the  periodic  data  which  are  to  be 
had  in  some  abundance.  Especially  will  attention  be  paid 
to  the  New  York  Stock  Exchange,  as  its  affairs  were  con- 
ducted in  the  31  consecutive  months  chosen,  with  a  view  to 
ascertaining  the  way  in  which  certain  important  functions 
of  the  typical  modern  stock  exchange,  as  they  are  set  forth 
in  current  economic  discussion,  were  discharged.  It  is 
hoped  that  the  general  results  of  the  investigation  will  show, 
in  some  degree,  how  effective  is  the  organization  of  the 
New  York  Stock  Exchange  for  the  fulfilment  of  certain 
economic  and  social  purposes,  for  which  stock  exchanges 
are,  by  assumption,  peculiarly  adapted. 

The  two  functions  most  generally  ascribed  to  a  large 
stock  exchange,  and  pre-eminently  to  that  of  New  York, 
by  economists,  are, 

1.  Directing  the  flow  of  capital  into  investments. 

2.  "  Discounting  "  future  events — that  is,  indicating  gen- 
eral economic  prosperity  or  dulness  by  the  course  of 
Stock  Exchange  prices,  thus  causing  those  prices  to 
serve  as  a  barometer  for  the  guidance  of  the  business 
community. 

An  analysis  of  transactions,  performed  according  to  the 
rules  and  customs  of  the  New  York  Stock  Exchange  over 
a  comparatively  limited  period,  will,  it  is  hoped,  throw  some 
light  on  the  degree  of  success  with  which  these  functions 
were  discharged  during  the  period  in  question;  and  also 


14  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [14 

will  enable  us  to  estimate  the  general  effectiveness  of 
Stock  Exchange  practice  in  discharging  these  functions  at 
any  other  time. 

If  the  rise  of  prices  on  the  Stock  Exchange,  in  the  last 
few  months  of  1904,  throughout  1905 — with  some  inter- 
ruptions— and  in  the  first  month  of  1906,  had  continued 
until  the  growth  of  general  prosperity  was  checked  in  1907, 
we  might  fairly  accept  prices  of  stocks  as  trustworthy  in- 
dices of  general  economic  conditions.  Or  even  if  the  rise 
had  been  continuous  up  to  the  autumn  of  1906,  followed 
by  the  sustained  decline  which  endured  through  1907  for 
the  most  part,  we  might  regard  the  general  movement  of 
prices  as  having  "  discounted  "  the  coming  depression.  But 
the  conditions,  under  which  the  long  decline  began  in  Octo- 
ber, 1906,  we  shall  show,  had  existed  throughout  the  earlier 
months  of  1906.  During  the  earlier  period,  however,  they 
had  not  developed  to  the  point  where  they  would  exert  their 
fullest  combined  effect.  The  conditions  to  which  we  refer 
are: 

1.  The  volume  of  speculation  for  the  rise  in  stocks. 

2.  The  strength  of  the  investment  demand  for  stocks. 

3.  The  tendency  of  speculation  to  adjust  the  volume  of 
its  operations  to  the  character  and  strength  of  the  in- 
vestment demand. 

The  power  of  making  the  adjustment  indicated  is  usually 
ascribed  offhand  to  speculators,  even  though  they  are  not 
aided  in  bringing  about  this  adjustment  by  the  mechan- 
ism of  the  particular  market  in  which  they  operate.  It  has 
never  been  shown  either  a  priori  or  inductively  that  or- 
ganized speculation  in  itself  has  the  faculty  of  guiding  in- 
vestment. Unless  the  customs  and  formal  rules  of  a  par- 
ticular stock  exchange  are  established  with  this  definite  aim 
in  view,  it  has  never  appeared  that  speculators  will  find  it 
to  their  individual  interest  to  direct  or  to  guide  investment; 


15]  INTRODUCTION  1 5 

although  the  collective  interest  of  any  body  of  speculators 
is  intimately  concerned  with  the  activity  of  investors,  as  we 
shall  show  later. 

In  the  economic  transformations  which  followed  the 
Spanish  War,  many  huge  new  industrial  corporations  were 
formed,  and  many  important  railroad  systems  had  been 
heroically  reorganized.  Some  corporations,  whose  stocks 
were  subject  to  frequent  and  heavy  transactions  in  the 
market,  and  which  had  been  firmly  established  before  the 
present  century,  had  not  been  seriously  affected  by  the  de- 
pression of  the  middle  nineties.  But  in  the  following  dec- 
ade they  operated  under  such  novel  conditions  that  their 
securities  were  on  a  basis  much  like  that  of  the  new  in- 
dustrial companies  and  of  the  reorganized  railroads.  Soon 
after  the  present  century  opened,  there  existed  a  huge  mass 
of  securities  of  uncertain  value  which  were  to  be  lodged 
ultimately  with  investors.  The  process  of  disposing  of 
these  securities  was  carried  on  to  some  extent  in  1901  and 
1902,  and  was  briefly  checked  by  a  special  concurrence  of 
events  in  1903.  After  many  months  of  relative  quiescence 
in  the  securities  markets  in  1904,  the  process  was  resumed 
in  September  of  that  year  on  a  large  scale;  and,  during  the 
next  few  years  the  completion  of  this  process  was  sought, 
partly  by  means  of  operations  connected  with  the  New 
York  Stock  Exchange.  During  that  time,  the  task  of 
those  connected  with  that  institution  was  chiefly  to  ''  di- 
rect the  flow  of  capital  "  toward  the  large  quantities  of 
stocks  which  had  been  listed  for  dealing,  but  which  were 
not  yet  finally  absorbed  by  investors.  To  accomplish  this, 
reliance  was  placed  on  the  self-interest  of  the  Stock  Ex- 
change's members  and  patrons,  conducting  their  various 
operations  under  the  conditions  imposed  by  the  customs  and 
formal  rules  of  that  Exchange.  Those  members  through 
whom  the  various  patrons  conducted  their  dealings  were, 


1 6  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [i6 

of  course,  brokers — in  the  strict  sense.  The  patrons  them- 
selves have  been  classified,  in  the  report  of  the  Hughes 
Committee,  as  follows : 

( 1 )  Investors,  who  personally  examine  the  facts  relating  to 
the  value  of  securities  or  act  on  the  advice  of  reputable  and 
experienced  financiers,  and  pay  in  full  for  what  they  buy. 

(2)  Manipulators,  whose  connection  with  corporations  issu- 
ing or  controlling  particular  securities  enables  them  under  cer- 
tain circumstances  to  move  the  prices  up  or  down,  and  who 
are  thus  in  some  degree  protected  from  dangers  encountered 
by  other  speculators. 

(3)  Floor  traders,  who  keenly  study  the  markets  and  the 
general  conditions  of  business,  and  acquire  early  information 
concerning  the  changes  which  affect  the  values  of  securities. 
From  their  familiarity  with  the  technique  of  dealings  on  the 
Exchange,  and  abiUty  to  act  in  concert  with  others,  and  thus 
manipulate  values,  they  are  supposed  to  have  special  advantages 
over  other  traders. 

(4)  Outside  operators  having  capital,  experience,  and  knowl- 
edge of  the  general  conditions  of  business.  Testimony  is  clear 
as  to  the  result  which,  in  the  long  run,  attends  their  opera- 
tions ;  commissions  and  interest  charges  constitute  a  factor 
aHvays  working  against  them.  Since  good  luck  and  bad  luck 
alternate  in  time,  the  gains  only  stimulate  these  men  to  larger 
ventures,  and  they  persist  in  them  till  a  serious  or  ruinous 
loss  forces  them  out  of  the  "  Street." 

(5)  Inexperienced  persons,  who  act  on  interested  advice, 
"  tips,"  advertisements  in  newspapers,  or  circulars  sent  by 
mail,  or  *'  take  flyers  "  in  absolute  ignorance,  and  with  blind 
confidence  in  their  luck.  Almost  without  exception  they 
eventually  lose. 

For  our  purposes,  the  above  detailed  classification  will 
not  be  necessary.  We  shall  consider  only  investors  — 
meaning  those  who  buy  outright,  not  only  for  purposes  of 
assured  income,  but  also  for  the  sake  of  obtaining  control 


17]  INTRODUCTION  17 

of  corporate  property — and  speculators  generally.  Most 
of  our  observations  will  apply  to  classes  (4)  and  (5),  when 
we  refer  to  speculators — that  is,  large  operators  and  in- 
experienced traders.  On  manipulators,  as  such,  and  their 
activities  we  shall  not  touch.  Accordingly  the  movement 
of  stocks  as  between  investors  and  speculators  generally 
will  be  the  aspect  of  Stock  Exchange  activity  Avhich  will 
chiefly  engage  our  attention.  The  nature  and  direction  of 
this  movement,  as  it  was  manifested  on  the  Stock  Exchange 
during  the  period  chosen  for  study,  detennined  the  degree 
of  success  with  which  the  process  of  the  final  disposition 
of  stocks  to  investors  was  attended. 

Incidentally  it  may  be  profitable  to  inquire,  in  the  course 
of  our  investigation,  whether  prices  on  the  Stock  Exchange 
were  determined  by  conditions  actually  existing  at  the  time 
a  given  set  of  prices  was  quoted,  or  whether  future  events, 
foreseen  but  dimly  by  ordinary  observers  or  quite  unlooked 
for,  were  so  clearly  apparent  to  speculative  foreknowledge, 
that  they  were  more  powerful  in  making  prices  than  were 
existing  conditions.  Was  the  smoothness  or  difficulty  of 
the  shifting  of  stocks  between  investors  and  speculators 
more  influential  on  price  movements?  Or  did  speculative 
"  discounting  "  of  future  events  constitute  the  predominant 
factor  in  making  Stock  Exchange  prices  ?  These  questions 
have  been  answered  repeatedly  with  provoking  assurance 
and  confidence,  on  the  strength  of  a  priori  impressions. 
It  is  hoped  that  considering  the  events  of  31  months  of 
sustained  activity  on  the  Stock  Exchange  will  afford  fuller 
information  on  these  points. 

Mention  has  already  been  made  of  the  wide  variations 
in  the  volume  of  sales,  month  by  month,  on  the  Stock  Ex- 
change. By  way  of  emphasizing  further  the  significance 
of  the  31  months'  period  under  consideration,  there  is  given 
below  the  number  of  shares  sold  during  each  period  of  the 


l8  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [ig 

same  length,  extending  from  each  September,  1900  to  1909, 
inclusive,  to  the  third  succeeding  March  in  each  case,  that 
is  from  1903  to  19 12,  inclusive,  and  the  average  monthly 
number  of  shares  sold  for  each  of  these  ten  periods  of  31 
months : 


31 

Consecutive  Months 
including 
Sept.,  1900  and  March,  1903 
Sept.,  1901  and  March,  1904 
Sept.,  1902  and  March,  1905 
Sept.,  1903  and  March,  1906 
Sept.,  1904  and  March,  1907 
Sept.,  1905  and  March,  1908 
Sept.,  1906  and  March,  1909 
Sept.,  1907  and  March,  1910 
Sept.,  1908  and  March,  191 1 
Sept.,  1909  and  March,  191 2 


Total  Number  of 
Shares  sold  on  the 
Stock  Exchange. 
558,508,621 
445.188,567 
493,762,756 
579,724,721 
730,177,023 

615.149,487 
524,678,046 
519,249,312 
487,034,946 
401,953,127 


Average  Number  of 
Shares  sold  each  month 
on  the  Stock  Exchange. 
18,016,407 
14,360,922 
15,927,831 
18,700,797 
23,554-097 
19,843,532 
16,925.098 
16,749,978 
15,710,805 
12,966,230 


It  will  be  noticed  at  once  that  the  period  which  will  par- 
ticularly claim  our  attention — extending  from  September, 
1904,  to  March,  1907 — was  characterized  by  much  the  larg- 
est total  number  of  shares  sold,  and  the  highest  monthly 
average,  of  all  the  periods  tabulated  above.  Most  economic 
discussion  treats  speculation  on  the  Stock  Exchange  as  if 
events  in  connection  with  it  had  the  same  import  and 
brought  about  the  same  results,  no  matter  what  volume 
of  transactions  took  place  in  differing  periods.  The  parti- 
cular period  to  be  studied  by  us  in  detail  was  attended  by 
an  abnormally  heavy  volume  of  sales.  It  seems  as  though 
the  significance  of  a  31  months'  period  in  which  more  than 
730  millions  of  shares  were  sold  might  differ  essentially  in 
character  from  that  of  a  period  in  which  the  sales  of  only 
400  millions  of  shares  were  recorded. 

The  selected  period  might  be  characterized  briefly  as 
follows : 

I.   It  began  in  a  pronounced  revival  of  speculative  ac- 


19]  INTRODUCTION  ig 

tivity — as  measured  by  volume  of  sales — after  some 
months  of  relative  quiescence. 

2.  It  closed  in  a  prolonged  and  thoroughgoing  liquida- 
tion involving  sales  of  a  large  number  of  shares. 

3.  It  coincided  with  a  period  of  uninterruptedly  ex- 
panding general  prosperity,  almost  world-v^ide  in 
extent 

4.  Its  close  shortly  preceded  a  check  to  general  pros- 
perity; the  severe  and  extensive  liquidation  in  the 
stock  market  might  either : 

a.  Have  been  a  factor  in  the  check  to  the  general 
prosperity,  or, 

b.  Have   "  discounted  "  that  check  to  the  general 
prosperity. 

5.  Its  duration  was  marked  by  a  high  degree  of  specula- 
tive activity  as  measured  by  average  monthly  sales  of 
23,554,097  shares,  as  over  against  13,249,121  shares 
sold  in  the  period  of  31  months  immediately  preced- 
ing, and  of  16,147,272  shares  in  the  period  imme- 
diately following. 

In  the  succeeding  chapters  we  shall  pay  special  regard  to 
the  demand  of  investors,  in  response  to  which  speculators, 
presumably,  were  conducting  their  operations.  The  events 
of  the  period,  which  are  to  be  studied,  were  chiefly  those 
which  bore  on  the  manifestations  of  the  investment  demand 
and  the  adjustment  of  speculative  operations  to  that  de- 
mand. After  we  have  considered  events  in  their  chrono- 
logical order  from  this  aspect,  we  shall  consider  the  general 
changes — qualitative  or  quantitative — undergone  by  the 
character  of  the  investment  demand ;  and  also  attempt  to 
analyze  the  extent  to  which  Stock  Exchange  traders  modi- 
fied the  volume  and  character  of  their  activities  in  accord- 
ance with  those  changes.  Then  the  possible  effects  on 
general  economic  conditions,  arising  from  the  speculative 


20  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [20 

response  to  investment  demand  in  the  latter  part  of  1906. 
will  be  taken  up.  Finally,  any  modifications  which  may 
seem  desirable  in  the  practice  of  trading  on  the  New  York 
Stock  Exchange — so  far  as  the  developments  of  the  period 
may  indicate  the  need  of  those  modifications — will  be  dis- 
cussed. But,  whether  the  changes  in  Stock  Exchange 
practice  should  be  brought  about  by  those  having  oversight 
of  stock  speculation  in  New  York  at  present,  or  by  govern- 
mental authority,  is  a  question  into  which  we  shall  not 
enter.  The  powers  of  either  agency  seem  ample  to  enact 
and  enforce  any  measures  that  may  appear  necessary,  but 
the  relative  desirability  of  having  either  source  of  author- 
ity called  upon,  in  preference  to  the  other,  will  not  come 
within  the  scope  of  our  considerations. 


CHAPTER  II 
Active  Speculation  :  Urgent  Investment  Deman 
september december,  i9o4 

According  to  the  Commercial  and  Financial  Chronicle, 
1,273,623  shares  were  sold  on  the  New  York  Stock  Ex- 
change Monday,  September  12,  1904.  Not  since  the  pre- 
ceding March  23d  had  the  sales  of  one  day  been  upwards 
of  one  million  shares.  Throughout  the  greater  part  of  the 
spring  and  during  the  entire  summer,  trading  on  the  Ex- 
change had  been  relatively  inactive.  But,  with  the  heavy 
sales  of  September  12th,  a  new  era  and  a  new  series  of 
movements  in  the  stock  market  may  be  said  to  have  begun. 
From  that  date  until  between  two  and  three  years  later 
— in  the  closing  days  of  March,  1907 — ensued  a  period  of 
public  speculation  in  securities  which  has  rarely  been  sur- 
passed in  sustained  activity  of  long  duration. 

Everything  appeared  favorable  for  success  in  speculation 
for  the  rise — at  least  those  factors  which  are  ordinarily 
considered  favorable.  The  surface  of  the  money  market 
— this  too  at  a  time  of  year  when  the  western  crop-moving 
demand  should  normally  impose  some  strain — was  quite 
untroubled.  To  be  sure,  the  report  of  the  Clearing  House 
banks  of  New  York  issued  September  loth,  had  shown  a 
loss  of  more  than  $9,000,000  in  the  combined  surplus  re- 
serves. However,  the  amount  of  that  item  in  the  bank 
statement  stood  at  $38,438,250;  the  total  reserves  con- 
stituted 28.1  per  cent,  of  the  combined  deposits.  Loans 
were  made  on  call  at  the  Stock  Exchange  with  interest 
21]  21 


22  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [22 

rates  ranging  from  %  to  2  per  cent.  The  gradual  but 
steady  revival  of  industry  and  commerce  had  not  reached 
a  point  where  it  taxed  the  facilities  of  the  money  market. 
W'hether  or  no  the  extremely  low  interest  rates  on  call 
money  served  to  stimulate  speculation,  may  be  doubtful : 
but,  at  any  rate,  those  rates  did  not  exert  the  repressive 
influence  on  speculative  sentiment  which  they  are  supposed 
to  do  in  the  first  month  of  autumn.  Trade  revival,  after 
the  setbacks  of  1903,  was  becoming  generally  manifest. 
But,  best  of  all  from  the  brokers'  viewpoint,  there  were 
many  individuals  with  sufficient  means  to  enable  them  to 
"  discount  "  the  prosperous  future  they  foresaw  by  enter- 
ing into  speculative  commitments  for  the  rise.  With  the 
subsequent  activities  of  these  speculators  we  shall  be  most 
immediately  concerned. 

The  rapid  recovery  from  the  depression  of  1903  was 
most  impressive  to  many  superficial  observers  who  recalled 
the  dreary  years  which  had  followed  the  crisis  of  the  pre- 
ceding decade;  the  seeming  inherent  likeness  of  the  two 
crises  was  emphasized  by  the  fact  that  ten  years,  making 
up  the  conventional  period  which  intervenes  between  suc- 
cessive crises,  had  elapsed  between  the  two  in  question. 
The  reaction  from  the  later  dulness  appeared  to  prove  that 
the  old-time  economic  crisis  had  passed  along  with  the 
nineteenth  century — in  this  country,  at  least — and  that,  in 
the  words  of  Jefferson  Brick  and  Major  Pawkins  uttered 
many  years  previous,  ''  we  were  a  young  lion  ",  and  "  had 
revivifying  and  vigorous  principles  within  ourselves ", 
which  would  now  serve  to  carry  us  through  an  indefinite 
period  of  unbroken  prosperity. 

It  was  further  seen  that  the  reorganizations  of  the  rail- 
roads on  a  large  scale,  which  had  been  effected  in  the  late 
nineties,  had  attained  more  successful  results  than  had  been 
thought  possible.     I'nion    Pacific,    Atchison,    Baltimore   & 


23]  ACTIVE  SPECULATION  23 

Ohio,  Northern  Pacific — all  had  been  heroically  reorgan- 
ized, and  had  already  shown  the  success  of  the  transforma- 
tion even  before  1903.  The  stock  market  decline  of  that 
year,  accompanied  as  it  was  by  a  pronounced  slackening  of 
trade  activity,  was  regarded  as  a  most  trying  ordeal, 
through  which  the  railroads  had  passed  without  radical 
damage.  A  falling  off  in  gross  volume  of  railroad  busi- 
ness was  clearly  perceptible  during  the  dull  period,  but  late 
in  1904  the  revival  and  also  the  improved  management  of 
American  railroads  began  to  attract  attention. 

As  a  factor  in  a  revival  of  Stock  Exchange  activity, 
there  was,  in  addition  to  the  relative  ease  with  which 
American  railroads  and  industry  had  withstood  the  over- 
rated depression  of  1903,  a  large  class  in  existence  which 
stood  ready  to  "  discount  "  the  future  of  boundless  pros- 
perity, which  it  was  thought  lay  ahead.  Of  this  class, 
little  can  be  said  by  way  of  general  description  or  broad 
characterization,  except  that  its  members  had  no  conscien- 
tious scruples  to  deter  them  from  stock  speculation,  they 
had  unlimited  confidence  in  the  country's  prosperity  and 
in  their  own  judgment  of  speculative  matters,  and  they 
individually  possessed  sufficient  means  to  advance  the  vary- 
ing amounts  of  margins  required  by  their  respective  brok- 
ers, with  which  they  could  back  their  several  judgments. 
From  the  ranks  of  the  very  wealthy  and  of  those  moder- 
ately well  off,  from  every  branch  of  business  and  from 
every  profession,  from  the  dwellers  in  cities,  small  towns 
and  rural  districts,  the  speculative  class  was  recruited.  The 
members  of  this  class  presented  among  themselves  as  wide 
variations  in  the  degree  of  their  abilities  to  engage  in 
speculation  as  any  quality  denoting  acumen  and  astuteness 
can  display  when  it  is  distributed  throughout  a  large  num- 
ber of  such  heterogeneous  individuals.  Among  them 
might  be  found  the  operator  who  would  not  scruple  to  em- 


24  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [24 

ploy  his  knowledge  of  a  corporation's  affairs  which  he  pos- 
sessed by  virtue  of  being  an  official  in  the  company  to 
manipulate  prices  or  to  guide  his  operations  in  the  market; 
and  there  could  also  be  found  those  who  had  the  haziest 
ideas  of  the  operations  of  the  stock  market  or  those  who 
deposited  their  margins  and  entered  into  their  commitments 
with  the  same  blithe  carelessness  with  which  they  would 
have  placed  their  money  on  a  whirl  of  the  roulette  wheel. 

To  some  extent,  that  is,  in  numbers  varying  widely  from 
time  to  time,  speculators  of  the  various  sorts  indicated  are 
always  present  in  the  stock  market — or  in  any  other  mar- 
ket where  the  routine  is  so  simplified  that  the  participant 
does  not  have  any  other  function  than  to  make  necessary 
payments  and  to  give  an  occasional  order  to  his  broker. 
In  1 901  and  the  two  succeeding  years  they  had  participated 
largely  in  the  active  markets  of  the  Stock  Exchange.  Since 
occasional  speculators  of  this  sort  usually  buy  for  the  rise, 
they  had  been  generally  unfortunate  as  a  class  because  of 
the  decline  of  prices  during  1903.  The  ill-success  of  ven- 
tures on  the  long  side  in  that  year  had  not  been  so  severe 
as  to  prevent  their  return  to  the  market  in  September,  1904, 
with  fresh  accessions  to  their  numbers. 

A  rising  movement  in  prices  generally  did  not  start  with 
the  renewal  of  activity  mentioned  as  having  taken  place 
on  September  12th,  1904.  The  first  week  of  general  ac- 
tivity was  not  immediately  productive  of  rich  rewards  for 
those  speculators  who  returned  to  Wall  Street  in  that  week, 
attracted  by  the  previous  rise  in  prices.  To  take  the  high 
and  low  points  respectively  for  the  stocks  in  which  during 
the  week  occurred  the  largest  volumes  of  transactions,  we 
find  that  those  points  from  Monday,  September  12th,  to 
Saturday,  September  17th,  inclusive,  were  as  follows: 


25]  ACTIVE  SPECULATION  25 

Range 

Railroads.  High.  Low.    Sept.  12-17, 

1904. 

Atchison      83^^  80^        2^ 

Chicago,  Milwaukee  &  St.  Paul   i59^  156^        2^ 

Erie    32^  29H         3 

Metropolitan   Street  Railway    123^  1205^        sH 

Missouri    Pacific    59^  96^        2% 

Pennsylvania   132^  127^         SH 

Reading 

voting  trust  certificates   68^  65  3^/^ 

Rock  Island     30  27^^         2>4 

Southern    Pacific    57^  55^         2^ 

Southern  Railway 

voting  trust  certificates   34%  32^        2% 

Union   Pacific   100  9714        2^ 

Amalgamated    Copper    59^/^  57  2^ 

American  Locomotive    28^^  24^  3^ 

U.  S.  Steel,  common 185^  14^  3^ 

U.  S.  Steel,  preferred   695/^  64^4  5^ 

Neither  the  high  nor  the  low  points  here  tabulated  were 
registered  on  the  concluding  day  of  the  week,  except  that, 
in  the  cases  of  the  two  classes  of  Steel  stock,  the  high 
points  were  attained  on  Saturday.  So  that  the  first  week 
of  heightened  speculative  activity  was  not  immediately  pro- 
fitable to  the  increased  number  of  speculators,  nor  cal- 
culated to  encourage  further  heavy  commitments  for  the 
rise.  In  fact,  the  first  week  of  revived  activity  showed 
such  little  decided  tendency  on  the  part  of  prices  to  move 
in  one  direction  or  the  other,  that,  in  the  next  business 
week,  September  19  to  24,  inclusive,  transactions  involving 
only  3,502,548  shares,  as  against  5,874,209  shares  in  the 
preceding  week,  were  recorded.  In  the  second  week 
named,  moreover,  no  day's  transactions  amounted  to  one 
million  shares;  in  the  earlier  week  there  had  been  four 
days  in  which  sales  exceeding  that  amount  had  been  made. 
Indeed,  the  market,  during  the  remainder  of   September, 


26  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [26 

displayed  no  such  volume  of  trading  as  had  been  shown  in 
the  business  week  which  ran  from  the  12th  to  the  19th,  in- 
clusive. September  was  far  ahead  of  the  preceding  months 
of  the  year  in  the  volume  of  its  sales,  amounting  to  18,- 
767,264.  This  total  is  to  be  compared  with  sales  of  12,- 
474,789  shares  in  August  and  12,462,393  shares  in  July. 
During  the  first  half  of  the  year  speculation  had  been  com- 
paratively quiescent,  except  for  a  brief  period  in  the  latter 
part  of  March,  following  the  Northern  Securities  decision 
in  the  middle. of  that  month. 

Accompanying  the  outburst  of  activity  on  the  Stock 
Exchange,  there  occurred,  in  the  course  of  the  month, 
rises  of  prices  of  the  stocks  in  w^hich  transactions  were 
heaviest,  indicated  by  the  closing  prices  on  September  ist 
and  on  October  ist,  respectively,  as  follows: 

Change 

Railroads.  Sept.  i.  Oct.  i.  during  the 

Month. 

Atchison     80^  83%  +    23^ 

Chicago,  Milwaukee  &  St.  Paul 154  160^  +    6^/$ 

Metropoliton  Street  Railway   119V4  122  +   2^4 

Missouri   Pacific   96^  9^%  +    ^H 

Pennsylvania    125  132^  -f    7% 

Reading 

voting  trust  certificates    61^  69  +    7% 

Rock  Island   25^  28^)^  +    2?^ 

Southern    Pacific    56^  57ys  +    ^Vs 

Southern  Railway 

voting  trust  certificates    28^  33}i  +    5 

Union    Pacific     97H  ^02^4  +    5 

Industrials. 

Amalgamated  Copper    56^  58^  4"    i^ 

American    Locomotive    207/^  27  4"   ^Vs 

U.  S.  Steel,  common  * 12^  t8->^  +    SH 

U.    S.    Steel,   preferred 61%  74%  +12^4 

One  cannot  always  speak  with  certainty  concerning  the 
general  tendency  of  stocks  to  move,  at  any  given  time, 
from  speculators'  hands  into  those  of  investors  or  in  the 


2y]  ACTIVE  SPECULATION  27 

contrary  direction — at  least  not  with  the  confidence  dis- 
played by  many  financial  writers.  The  process,  by  which 
stocks  were  gradually  sold  by  speculative  holders  to  in- 
vestors, can  only  be  inferred  by  w^atching  the  readily  as- 
certainable manifestations  of  stock  market  phenomena. 
The  heavy  volume  of  transactions  on  the  Stock  Exchange 
was  attended  by  rising  prices,  which  would  mean  either  that 
an  appreciable  effective  investment  demand,  or  else  the 
speculative  purchases  in  expectation  of  higher  prices,  was 
operative  in  bringing  about  the  general  advance  of  prices. 
If  the  latter  had  been  chiefly  instrumental  in  raising  prices, 
some  evidence  of  strain  in  the  money  market  should  have 
been  apparent.  But  there  was  no  such  strain  manifested. 
Call  loans  were  still  made  at  from  2  to  3  per  cent,  while 
at  the  same  time  the  reported  loans  of  the  Clearing  House 
banks  were  undergoing  heavy  reductions.  That  purchas- 
ing investors  were  present  in  considerable  numbers  and 
well  supplied  with  funds  was  clear  from  the  readiness  with 
which  many  large  bond  issues  were  absorbed  when  they 
were  offered  for  subscription.  From  the  mere  report  of 
sales  on  the  Stock  Exchange  and  the  course  of  prices 
registered  there,  one  can  only  draw  the  vaguest  inferences. 
But  the  continuous  rise  of  prices  and  sustained  heavy 
volume  of  sales — both  taken  in  connection  with  the  low  call 
rates,  diminishing  volume  of  loans  shown  in  the  weekly 
reports  of  the  Clearing  House  banks,  and  the  readiness 
with  which  bonds  were  taken  by  investors — seem  most 
reasonably  explained  by  the  inferred  tendency  of  investors 
to  take  large  amounts  of  dividend-paying  stocks  out  of 
speculative  hands. 

November  was  likewise  a  month  characterized  by  heavy 
sales  and  rising  prices  on  the  Stock  Exchange.  The  ac- 
tivity there  was  quite  as  intense  as  it  had  been  during  Octo- 
ber.    The  result  of  the  Roosevelt-Parker  presidential  elec- 


28   SfECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [28 

tion  had  been  clearly  foreseen  for  some  time,  and  caused 
little  interruption  in  the  course  of  Stock  Exchange  events. 

Many  issues  of  new  securities  were  announced  during 
November,  by  way  of  taking  advantage  of  the  easy  money 
market  and  the  vast  investment  resources  which  had  been 
apparent  for  some  time.  Many  of  the  bond  issues — 
whether  nev/  or  now  finally  "  digested  " — bore  the  rate  of 
3J/2  or  4  per  cent,  interest,  rates  of  return  which  were 
not  to  prove  so  alluring  a  short  time  afterward.  Ap- 
parently any  kind  of  securities,  issued  under  moderately 
respectable  auspices,  appeared  certain  of  a  market;  the  in- 
vestment demand  seemed  limitless  in  its  absorptive  capacity. 

Toward  the  latter  part  of  the  month,  however,  the  at- 
tainment of  a  4  per  cent,  level  by  the  Stock  Exchange  call 
rate,  followed  the  substantial  diminution,  during  the  month, 
of  surplus  reserves  held  by  the  Clearing  House  banks  from 
$16,793,650  to  $8,539,075 — this,  too,  in  spite  of  concurrent 
reductions  of  deposits  and  loans.  To  a  large  extent,  the 
decreases  in  those  items  could  have  been  ascribed  to  gold 
exports,  amounting  to  $20,500,000.  Regarding  this  it 
was  said,  "A  demand  to  remit  for  American  securities 
bought  in  London  for  New  York  account  was  at  times 
noted  and  there  was  likewise  a  demand  to  pay  for  New- 
York  City  revenue  bonds  placed  abroad  the  previous  spring 
and  now  being  returned."  ^ 

Although  the  investment  market  still  displayed  a  readi- 
ness to  accept  all  offers  of  securities  made  to  it,  and  like- 
wise was  absorbing  large  amounts  of  securities  from  the 
open  market,  the  advance  of  the  call  rate  to  4  per  cent. — 
quite  striking  in  view  of  the  2  and  3  per  cent,  rates  which 
had  prevailed  for  a  long  period  preceding — the  large  ex- 
ports of  gold,  and  the  return  of  American  securities  from 

^  Commercial  and  Financial  Chronicle,  "Retrospect  of  1904."  Jan.  7, 
1905.  P-  87. 


29]  ACTIVE  SPECULATION  29 

abroad,  all  served  as  indications  of  the  definite  limits  to  the 
investors'  absorptive  capacity  and  the  consequent  strain  to 
which  the  speculative  body  might  be  subjected.  However, 
these  possibilities  found  little  reflection  in  Stock  Exchange 
prices,  which  rose  to  the  very  end  of  the  month.  In  the 
movement  which  had  proceeded  through  the  first  two 
autumn  months,  money  market  conditions  had  been  so 
easy  as  to  be  negligible  factors  in  Stock  Exchange  cal- 
culations. 

Although  everything  during  November — except  the  rise 
of  the  call  rate  to  4  per  cent,  already  mentioned — had  be- 
tokened the  presence  of  purchasing  investors  w'ith  suffi- 
cient means  to  relieve  the  speculators  for  the  rise  from 
carrv'ing  too  heavy  a  burden,  the  first  serious  check  to  the 
prolonged  bull  movement  occurred  on  December  8th. 
Amalgamated  Copper,  particularly,  was  in  a  strategically 
weak  market  position  in  that  it  was  heavily  sold  and  pur- 
chased by  speculative  traders  for  the  most  part,  and  the 
conduct  of  the  company's  business  was  not  on  such  a 
stable  basis  as  to  attract  investors.  Fierce  magazine  at- 
tacks on  the  management  of  that  company  and  the  weak 
position  of  those  who  w-ere  speculating  in  it,  together  com- 
bined to  depress  the  price  of  that  security.  The  specula- 
tion for  the  rise  in  many  other  stocks  had  been  quite  out 
of  proportion  to  the  investment  demand  for  them,  and 
they  also  declined  in  their  respective  prices.  December 
8th  was  the  date  on  which  occurred  a  panic  of  a  minor  sort, 
accompanied  by  the  quotation  of  a  5  per  cent,  call  rate.. 
The  next  few  days  saw  the  reaction  from  the  severe  gen- 
eral decline  of  the  8th  in  the  form  of  rising  prices,  but  a 
pronounced  fall  recurred  on  the  12th.  This  latter  decline 
was  followed  by  a  week  of  relative  inactivity;  but,  after 
the  20th,  the  general  rise  of  prices  which  followed  the 
break  of  the  12th  was  accompanied  by  a  renewed  outburst 


30  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [30 

of  activity — that  is,  by  an  increased  volume  of  daily  sales; 
the  latter,  however,  were  not  on  the  tremendous  scale  ob- 
served in  October  and  November.  On  the  last  two  busi- 
ness days  of  the  year  the  sales  on  each  day,  the  29th  and 
30th,  amounted,  respectively,  to  1,112,986  and  1,103,689 
shares. 

The  declines  in  prices,  which  occurred  on  December  8th 
and  1 2th,  acted  so  as  to  offset  the  steadily  rising  tendency 
shown  in  the  stock  market  during  the  remainder  of  the 
month — particularly  the  latter  half  of  it — so  that  prices  of 
the  leading  stocks  did  not  display  the  ''  buoyancy  " — to  use 
a  figure  of  the  financial  reporters — which  was  so  evident  in 
September,  October  and  November,  when  the  prices  of 
those  various  stocks  recorded  on  December  ist  were  com- 
pared with  prices  established  on  the  opening  business  day 
of  the  following  month,  January  3,  1905.  Nevertheless 
the  rising  tendency  of  prices  was  clearly  in  evidence  at  the 
close  of  the  year  1904;  the  last  four  months  of  this  year 
may  be  regarded  as  constituting  the  early  stage  of  the  three 
years'  market  movement  we  have  set  out  to  consider. 

The  most  prominent  aspects  of  this  four  months'  period 
have  already  been  mentioned — a  sustained  heavy  volume  of 
transactions  on  the  Stock  Exchange,  generally  rising 
prices,  and  the  prevalence  of  low  call  rates  throughout 
the  four  months,  except  for  the  rates  quoted  on  a  few  days. 
Whether  these  three  striking  phenomena  conclusively 
])ointed  to  the  presence  of  a  large  body  of  purchasing  in- 
vestors may  be  questioned.  Taken  all  three  together,  they 
constitute  strong  negative  evidence  in  contravention  of  the 
hypothesis  that  speculative  commitments  for  the  rise  were 
out  of  all  proportion  to  the  capacity  of  investment  absorp- 
tion. The  ready  investment  in  large  issues  of  new  rail- 
road and  industrial  securities  which  were  taken  during  the 
autumn  of   1904,  indicated  the  presence  of  a  number  of 


3i]  ACTIVE  SPECULATION  31 

complaisant  investing  purchasers;  although,  in  itself,  this 
readiness  did  not  necessarily  mean  that  the  same  body  of 
investors  was  engaged  in  lightening  the  load  of  specula- 
tors on  the  Stock  Exchange. 

In  the  last  three  or  four  months  of  1904  there  was  seen  a 
speculative  stock  market  of  intense  activity  and  wide  ex- 
tent. If  speculation  for  the  rise  was  active  and  its  aggre- 
gate transactions  were  on  an  exceedingly  large  scale,  that 
large  volume  of  transactions  was  carried  on  without  ac- 
companying disturbance  in  the  New  York  money  market. 
There  were  ample  funds  available  for  call  loans,  with  which 
speculative  purchases  could  be  financed ;  and  those  loans 
were  made  at  the  traditionally  low  rates  of  interest  which 
are  usually  a  distinct  characteristic  of  Wall  Street  call 
loans.  Speculative  transactions,  moreover,  presented  a 
larger  aggregate  in  October  and  November  than  they  did 
in  December,  toward  the  end  of  the  movement.  On  two 
days  in  December,  the  general  declines  in  the  stock  market 
appeared  to  indicate  either  an  over-extended  speculation 
for  the  rise,  in  the  face  of  a  satiated  investment  demand, 
or  else  they  showed  that  speculators  were  entering  into 
commitments  for  the  rise  more  rapidly  than  purchasing  in- 
vestors were  disposed  to  withdraw  the  stocks  from  specu- 
lative hands.  Such  halts  in  a  prolonged  rising  movement 
are  perhaps  inevitable. 

The  characteristics  of  the  New  York  Stock  Exchange 
speculative  market  in  the  concluding  months  of  1904  were 
typical  of  a  normal  market  during  a  time  of  expanding 
prosperity — such  as  are  assumed  in  a  discussion  of  specu- 
lation in  general.  In  such  a  discussion,  the  values  of  the 
securities  involved  in  the  speculation  and  their  desirability 
from  the  investors'  viewpoint,  are  reckoned  the  chief  fac- 
tors in  determining  prices.  The  desirability  of  investment 
securities,  by  assumption,  becomes  evident  to  speculators 


32   SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [32 

before  investors  perceive  it.  The  forehanded  speculators, 
accordingly,  either  purchase  stocks  at  comparatively  low 
prices  or  continue  to  hold  those  they  have  already  pur- 
chased, and  sell  out  finally  to  investors  at  higher  prices 
than  those  at  which  the  several  speculative  purchases  have 
been  made.  Before  the  securities  are  sold  by  speculators 
to  investors,  their  investment  desirability  is  clouded  with 
some  uncertainty  which,  however,  is  gradually  dispelled ; 
until,  at  last,  the  soundness  of  the  securities  in  question 
becomes  so  evident  that  they  are  almost  entirely  absorbed 
by  investors.  A  few  unfortunate  speculators,  however, 
are  entrapped  into  making  their  purchases  at  the  topmost 
prices.  At  these  prices,  comparatively  few  investment 
purchases  are  made.  Therefore,  those  speculators  who 
bought  at  the  top  are  compelled  to  sell  with  great  or  slight 
losses.  The  number  of  those  injudicious  speculators  is  as- 
sumed to  be  negligible — at  least,  as  compared  to  the  num- 
ber of  successful  speculators,  who  have  sold  to  investors 
on  the  preceding  rise  of  prices.  Moreover,  the  recession 
in  prices,  which  accompanies  the  liquidation  by  the  un- 
successful speculators,  is  supposed  to  attract  investors  who 
are  ready  enough  to  buy  at  prices  somewhat  less  than  the 
maximum,  at  which  they  were  not  disposed  to  make  pur- 
chases. To  a  great  extent  then,  stocks  of  demonstrated 
worth  to  investors  are  absor]>ed  by  the  latter.  They  pay 
the  increased  prices  to  speculators  for  carrying  the  stocks 
over  a  period  of  uncertainty. 

Those  who  assumed  that  speculation  for  the  rise  and  in- 
vestment, during  a  period  of  growing  prosperity,  follow 
the  course  outlined  above,  might  have  pointed  to  the  events 
of  1904  in  the  New  York  stock  and  money  markets,  as  af- 
fording confirmation  of  their  assumption.  Prior  to  Sep- 
tember, in  relatively  small  numbers,  and  after  the  12th  of 
that  month  in  growing  numbers,  speculators  were  coming 


^^]  ACTIVE  SPECULATION  33 

to  perceive  the  investment  demand  which  would  soon  mani- 
fest itself.  Speculative  appreciation  of  stocks  kept  in  ad- 
vance of  investors'  recognition  of  their  desirability;  not, 
how^ever,  so  far  in  advance  that  speculators  were  left  with 
stocks  on  their  hands  w^hich  investors  would  not  purchase 
— at  least,  not  for  any  length  of  time.  Early  in  December, 
to  be  sure,  it  seemed  as  if  speculators  had  over-estimated 
the  urgency  of  the  investment  demand.  The  latter,  ap- 
parently, again  exerted  itself  after  a  few  days'  quiescence, 
and  speculative  evaluation  ran  only  slightly  in  advance  of 
investment  absorption.  This  tendency  was  noticeable  up 
to  the  very  end  of  December,  1904,  and  bade  fair  to  continue 
indefinitely  into  1905. 

In  connection  with  the  tendency,  observable  during  the 
later  months  of  1904,  of  investment  buying  to  lag  only 
slightly  in  the  rear  of  speculative  activity,  and  in  connection 
with  issues  of  new^  securities,  the  American  correspondent 
of  the  Economist,  wTiting  December  20.  1904,"  made  the 
following  observations : 

One  of  the  most  encouraging  features  now  observable  is  the 
more  moderate  volume  of  business  and  the  continued  demand 
from  abroad  for  the  better  class  of  American  shares  and 
bonds.  There  is  evidence  also  that  many  non-professional 
traders  have  left  the  Street,  and  it  is  an  excellent  sign  that 
some  of  them  have  been  transferring  their  accounts  from  specu- 
lative to  investment  securities.  In  no  other  way  is  the  confi- 
dence in  the  general  situation  better  shown  than  by  the  ease 
with  which  the  public  absorbs  issue  after  issue  of  new  bond 
flotations — Japanese,  New  York  City,  Rock  Island,  Mexican, 
Missouri  Pacific,  Atchison,  Cincinnati,  and  others — not  to  men- 
tion the  extraorrlinary  volume  of  municipals  which  have  been 
taken  np  by  trust  companies,  savings  banks,  and  investors  gen- 
erally during  the  entire  year. 

'  Economist,  Dec.  31,   1904.  p.  2138. 


34  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [34 

The  very  general  comment  is  that  stocks  are  now  in  stronger 
hands,  and  that  the  irrational  dealings  in  purely  speculative 
non-dividend  payers  having  been  eliminated,  the  outlook  is  for 
a  gradual  and  healthful  recovery  in  the  stock  market.  Whether 
the  little  traders  who  were  burned  in  the  conflagrations  of  last 
week  and  the  week  before  will  be  able  to  extract  any  comfort 
from  the  reflection  that  stocks,  once  held  by  them  expectantly, 
on  margins,  are  now  owned  by  strong  interests,  who  bought 
and  paid  for  them  when  they  were  near  the  lowest  in  the  re- 
cent crashes,  may  best  be  left  to  the  small  traders  themselves 
to  decide. 

It  is,  however,  a  matter  of  some  comfort  to  realize  that  the 
situation  in  the  Street  is  such  that  it  again  seems  practicable 
to  estimate  the  probable  values  of  securities  by  analyses  of 
their  earning  power,  the  condition  of  general  trade,  and  the 
financial  situation.  Reference  to  the  latter  gives  an  encour- 
aging view,  for  the  heavy  inflow  of  funds  from  the  West  has 
been  enough  to  add  to  the  cash  held  by  the  New  York  banks 
over  and  above  the  drafts  on  the  latter  to  supply  the  gold 
which  has  gone  abroad. 


CHAPTER  III 
Changing  Conditions  of  Investment — 

1905 

At  the  beginning  of  1905,  speculative  activity — meas- 
ured by  volume  of  transactions  on  the  Stock  Exchange — 
did  not  maintain  the  height  it  had  displayed  in  the  closing 
months  of  1904.  The  movements  of  the  stock  market  did 
not  possess  quite  the  same  significance  which  could  have 
been  ascribed  to  them  in  the  preceding  year.  But  if  de- 
velopments in  connection  with  the  stock  market  were  not 
of  a  nature  to  encourage  speculation  on  a  very  large  scale 
— as  in  October  and  November,  1904 — no  events  occurred 
which  would  lead  to  the  general  discouragement  of  specu- 
lators or  to  the  general  diminution  of  the  aggregate  funds 
they  might  be  willing  to  employ  in  "  anticipating  the  needs 
of  the  market."  And  certainly  the  almost  unchecked  ex- 
pansion of  general  prosperity  in  itself  seemed  to  ofifer 
stronger  and  stronger  inducements  to  investors  as  the 
year  went  on. 

The  attitude  of  investors  toward  various  stocks  listed 
on  the  Exchange  was  not  revealed  with  any  clearness.  The 
slight  declines  of  prices,  in  March  and  August,  and  also 
the  pronounced  general  fall  occurring  in  April,  might  have 
pointed  to  the  tendency  of  speculators  to  over-estimate  the 
effective  investors'  demand,  and  to  base  their  operations  on 
the  erroneous  judgments  they  had  formed  on  the  basis  of 
excessive  estimates  on  this  point.  But,  on  the  other  hand, 
the  extensive  and  appreciable  net  advances  of  prices,  be- 
35]  3: 


36  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [36 

tween  January  3rd  and  December  30th,  showed  that  m- 
vestment  buying  did  not  apparently  lag  far  behind  specu- 
lative operations.  The  monthly  records  of  sales  on  the 
Stock  Exchange  were  heavier  than  the  average  records  for 
corresponding  months  in  the  preceding  five  years;  but  in- 
vestment buying,  w^hich  always  operates  to  some  extent, 
vvas  not  apparently  in  very  much  lighter  volume  than  it 
had  been  in  1904 — so  far  as  this  could  be  ascertained 
directly. 

In  the  general  investment  market,  however,  striking 
changes  took  place  in  the  course  of  the  year.  The  quali- 
tative nature  of  these  changes  was  manifested  in  the  char- 
acter of  securities  offered  directly  to  investors — both  as  to 
the  terms  on  which  the  securities  were  issued  and  the  prices 
at  which  investors  were  asked  to  purchase  them.  These 
changes  mentioned,  of  course,  pointed  to  the  prevailing 
opinion  among  bankers  that  the  investment  situation  had 
undergone  transformation  of  some  sort;  they  did  not  in- 
dicate directly  a  transformation  in  the  character  or  extent 
of  the  investment  demand  for  listed  stocks.  However,  if 
we  may  regard  the  terms  on  which  investors  were  invited 
to  take  various  issues  of  bonds  and  other  securities,  as 
indicative  of  an  investment  demand  that  differed  from  the 
one  revealed  in  1904,  we  may  consider  in  detail  a  number 
of  issues  of  new  securities  which  were  announced  in  1905, 
with  a  view  to  ascertaining  the  significance  attached  to  them 

Of  the  Japanese  government  loans,  through  which  the 
ex  post  facto  financing  of  the  Russian  war  was  arranged, 
two  allotments  to  American  investors  were  brought  out 
during  the  year.  The  total  of  the  two  allotments  pre- 
sented for  public  subscription  in  this  country  amounted  to 
£25,000,000;  they  were  readily  taken,  in  fact  oversub- 
scribed in  large  amounts.  Each  loan  bore  interest  at  4^^ 
per  cent,  and  the  bonds  representing  it  were  offered  at  87)^. 


37]  CHANGING  CONDITIONS  OF  INVESTMENT  37 

The  extent  of  the  oversubscription  may  have  indicated  an 
error  on  the  part  of  the  bankers  engaged  in  putting  out  the 
loans,  in  that  they  made  the  terms  unnecessarily  favorable 
to  the  subscribers.  Possibly  then  the  outcome  of  the  sub- 
scription to  these  bonds  might,  at  that  time,  have  shown 
that  the  bankers  had  merely  under-estimated  the  capacities 
of  investment  absorption.  But  the  significance  of  these 
loans,  in  another  respect,  was  obvious  enough.  If  the  capa- 
city of  investment  absorption  had  any  reasonable  limita- 
tions at  all,  the  total  amount  of  this  country's  available 
investment  funds  had  been  reduced  by  more  than  $100,- 
000,000  in  order  to  finance  a  foreign  war.  This  consider- 
ation too  was  aside  from  the  evident  fact  that  European 
investors'  resources — a  main  reliance  of  American  dealers 
in  securities — were  concurrently  restricted  by  heavy  offer- 
ings of  the  same  loans  abroad.  Whatever  then  might  have 
been  the  other  effects  of  the  Russo-Japanese  war  on  the 
general  conditions,  which  speculators  had  to  consider  in 
n^aking  their  forecasts,  the  financing  of  that  war  necessit- 
ated a  substantial  reduction  in  the  total  investment  fund  on 
which  speculation  ultimately  depended  for  its  general 
success. 

Not  all  financial  authorities,  however,  seemed  to  think 
that  the  time  had  passed  when  3^  or  4  per  cent,  bonds 
would  attract  investors.  The  Pennsylvania  Railroad 
announced  an  issue  of  3 J/2  per  cent,  bonds,  amounting 
to  $100,000,000,  to  which  its  stockholders  were  invited  to 
subscribe.  This  issue  was  announced  in  March,  but  in 
May  it  appeared  that  stockholders  had  valued  the  privilege 
of  subscription  so  lightly  that  they  had  applied  for  only 
10  per  cent,  of  the  proposed  issue.  In  spite  of  this  rail- 
road's ill-success  with  securities  of  this  particular  nature, 
the  Delaware  &  Hudson  announced  an  issue  of  3^^  per 
cent,  convertible  bonds,  amounting  to  $10,000,000.     There 


38  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [38 

were  put  out  also  $10,000,000  of  3>4  per  cent,  ist  mort- 
gage bonds  of  the  Washington  Terminal  Company,  guaran- 
teed jointly  by  the  two  roads  directly  interested  in  the  pro- 
jected construction,  the  Baltimore  &  Ohio  and  the  Phila- 
delphia, Baltimore  &  Washington.  That  31/^  per  cent, 
bonds  had  a  definitely  restricted  market  was  indicated  by 
the  conditions  and  results  of  the  issues  named  above. 

Early  in  1905,  at  any  rate,  difficulties  in  marketing  4 
per  cent,  bonds  had  not  become  manifest.  Large  issues  of 
4  per  cent,  bonds,  of  the  Southern  Pacific  and  Missouri 
Pacific  in  particular,  were  sold  by  bankers  in  February. 
In  March  the  American  Telephone  and  Telegraph  Company 
also  announced  an  issue  of  4  per  cent,  bonds  amounting  to 
$25,000,000.  But  some  months  later — in  June — there  was 
announced  another  issue,  consisting  of  $23,859,000  4  per 
cent,  bonds  of  the  Chicago,  Burlington  &  Quincy  Railroad. 
Illinois  Division.  At  the  time  and  throughout  the  re- 
mainder of  the  year,  the  ordinary  observer  would  have  re- 
garded the  success  of  this  issue  as  a  matter  of  course.  Not 
until  the  following  year  was  it  reported  that  these  bonds 
could  not  be  sold  to  investors  in  their  entirety  and  that  the 
underwriting  had  been  attended  with  losses  to  those  who 
participated  in  it.  To  this  matter  we  shall  refer  later. 
But,  at  this  point,  we  may  compare  the  ultimate  result  of 
this  bond  issue  with  that  of  the  Missouri  Pacific's  $25,- 
000,000  issue  of  4  per  cent,  bonds  sold  in  February;  the 
amount  of  the  subscriptions  to  the  latter  issue  was  reported 
to  have  run  as  high  as  $200,000,000. 

Early  in  the  year  long-term  bonds  bearing  interest  at 
4  per  cent,  were  marketed  with  the  same  ease  as  in  the 
latter  part  of  1904.  Although  the  impossibility  of  selling 
the  Burlington  bonds  did  not  appear  during  the  year 
1905,  the  fact  that  it  was  eventually  reported  serves  to 
emphasize    the   change   which   many   bankers    had   appar- 


39]  CHANGING  CONDITIONS  OF  INVESTMENT  39 

ently  observed  taking  place  in  the  nature  of  the  in- 
vestment demand.  The  change  might  have  consisted  of  a 
quantitative  restriction  or  in  the  growth  of  a  demand  for  a 
higher  rate  of  return  on  investment  funds.  The  issue  of 
securities,  bearing  higher  rates  of  interest  than  the  tradi- 
tional 3^  or  4  per  cent.,  might  have  served  to  bring  into 
a  restricted  class  of  investors  some  who  were  not  ordin- 
arily to  be  found  there,  if  the  apparent  change  arose  from 
a  diminished  power  of  investment  absorption.  Or  if  the 
change  in  the  investment  market  sprang  chiefly  from  a 
general  demand  for  a  higher  rate  of  return,  putting  out 
bonds  at  4j4  per  cent,  would  operate  to  meet  that  demand. 
Accordingly  the  diminishing  number  of  4  per  cent,  bond 
issues  in  1905  and  the  number  of  4^  per  cent,  issues  which 
appeared  might  have  indicated  a  general  demand  for  higher 
rates  of  return  by  an  investing  class  that  was  just  as  well 
equipped  to  present  an  effective  demand  as  it  ever  was,  or 
it  might  have  been  regarded  as  an  expedient  for  attracting 
funds  from  individuals  to  whom  ordinarily  such  invest- 
ment issues  would  not  be  expected  to  make  any  appeal. 

The  Interborough  Rapid  Transit  Company  had  recourse 
to  three-year  4  per  cent,  notes  as  a  means  of  obtaining 
$10,000,000  of  new  capital  in  May.  In  the  more  stringent 
period  of  1903,  and  within  two  years  following  this  time, 
the  expedient  of  short-term  notes  w^as  quite  common ;  but 
in  1905  it  was  not  at  all  generally  employed.  The  usual 
adjustment  to  the  changed  character  of  investors'  require- 
ments was  to  increase  the  rate  of  interest  borne  by  new 
issues  of  bonds,  or,  as  in  the  cases  of  the  Japanese  bond 
issues,  to  offer  the  securities  at  prices  well  under  par. 

In  January  a  decision  was  rendered  by  the  United  States 
Circuit  Court  of  Appeals  in  Philadelphia,  which  finally 
determined  the  disposal  of  the  railroad  stocks  owned  by  the 
Northern  Securities  Company.     One  party  to  the  suit  that 


40  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [40 

elicited  the  decision  was  composed  of  Mr.  E.  H.  Harriman 
and  the  allied  Union  Pacific  interests.  Since  they  held  a 
controlling  interest  in  Northern  Pacific,  at  the  time  the 
Northern  Securities  Company  was  formed  and  the  railroad 
stocks  in  question  handed  over  to  that  company,  they  con- 
tended that  the  distribution  of  the  assets  of  the  dissolved 
holding  company  should  consist  of  returning  the  stocks  to 
their  original  owners.  In  this  way  the  control  of  North- 
ern Pacific  would  again  be  lodged  in  those  hands  where  it 
had  lain  before  the  Northern  Securities  Company  was 
formed.  The  Hill-Morgan  interests,  however,  stood  out 
for  a  strictly  pro-rata  distribution  of  the  company's  assets; 
and  the  decision  favored  their  contention. 

The  practical  result  of  this  decision,  from  the  standpoint 
of  Stock  Exchange  speculation,  was  eventually  to  throw  a 
large  portion  of  Northern  Pacific's  stock  upon  the  open 
market,  and  later  much  of  Great  Northern's  also.  Thus 
the  speculative  class  was  to  be  burdened  with  the  task  of 
carrying  large  blocks  of  comparatively  high-priced  stocks 
until  investors  saw  fit  to  purchase  them  in  large  part — if 
they  ever  should  see  fit  to  do  so.  The  Union  Pacific  inter- 
ests no  longer  had  any  inducements  to  withhold  a  large 
amount  of  Northern  Pacific  stock  from  the  open  market, 
as  throughout  this  period  they  did  with  $90,000,000  of  the 
common  stock  and  $37,000,000  of  the  preferred  stock  of 
Southern  Pacific.  And  finally,  both  Northern  Pacific  and 
Great  Northern  became  at  times  prominent  in  the  general 
speculative  movement;  in  their  cases,  speculators  were 
called  upon  to  forecast  the  investment  demand  as  best  they 
might.  And  moreover  investors  generally  had  their  at- 
tention drawn  more  or  less  effectively  to  these  two  stocks 
and  possibly  distracted  from  others  which  they  might  have 
been  led  to  purchase.  The  final  release  of  these  two  stocks 
from  the  custody  of  the  illegal  holding  company  meant  that 


41  ]  CHANGING  CONDITIONS  OF  INVESTMENT  41 

speculators,  on  the  one  hand,  had  an  increased  burden,  and 
that  the  test  of  investors'  powers  of  absorption,  on  the 
other  hand,  would  be  made  harder  within  a  short  time. 

Rumors,  which  had  to  do  with  a  possible  railroad  merger 
involving  the  Union  Pacific  and  the  so-called  Vanderbilt 
system,  had  been  responsible,  for  sharp  rises  in  the  prices 
of  Union  Pacific,  New  York  Central  and  Chicago  &  North- 
western, early  in  the  year.  Whatever  may  have  been  the 
basis  for  this  rumor,  it  was  pretty  thoroughly  dispelled  in 
a  short  time,  followed  by  the  collapse  of  speculation  based 
on  it,  and  resulting  in  temporary  declines  in  the  prices  of 
the  stocks  concerned  in  the  proposed  merger.  Another 
rumor,  of  the  same  sort,  of  a  combination  of  Southern 
steel  and  iron  properties  was  widely  believed  and  conse- 
quently speculation  for  the  rise  was  active  in  certain  stocks 
— notably  Tennessee  Coal  &  Iron — on  the  strength  of  its 
possible  truth.  This  rumor,  however, — in  respect  of  the 
immediate  formation  of  the  merger  at  least — also  proved 
to  be  quite  baseless,  with  disastrous  losses  to  unfortunate 
speculators  who  had  acted  on  it. 

Quite  aside  from  the  checks  imposed  on  speculation  in 
some  directions  when  these  vague  rumors  were  shown  to 
have  no  foundation,  the  matter  of  these  rumors  was  signi- 
ficant in  that  it  indicated  one  expected  outlet  for  the  gen- 
eral retirement  of  speculative  commitments.  If  either  of 
the  projected  mergers  had  come  into  being,  many  stocks 
would  probably  have  been  withdrawn  from  the  market  in- 
cidentally to  the  formation  of  these  mergers.  But  since 
these  combinations  were  not  formed,  the  final  withdrawal 
of  the  stocks  in  question  from  the  hands  of  speculators 
would  have  to  be  effected  through  the  purchases  of  in- 
dividual investors  operating  on  a  relatively  small  scale.  At 
times  scattered  throughout  the  decade  certain  stocks  had 
been  absorbed   in  various  mergers.     Chicago,   Burlington 


42   SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [42 

&  Quincy,  for  example,  was  jointly  owned  almost  com- 
pletely by  the  Great  Northern  and  Northern  Pacific,  as  a 
result  of  extensive  purchases  in  the  open  market.  And, 
in  their  turn,  the  latter  two  roads  had  had  their  stocks 
withheld  from  the  market  during  the  brief  existence  of 
the  Northern  Securities  Company.  Prior  to  the  dissolu- 
tion of  this  holding  company,  absorption  of  this  general 
character,  in  the  cases  of  particular  railroad  stocks,  con- 
stituted a  process  which  always  presented  itself  to  specula- 
tors as  an  impending  possibility.  But  the  events  of  1905 
tended  to  make  such  possibilities  more  remote.  As  the 
general  speculative  movement  assumed  form  toward  the 
close  of  1905,  the  participants  in  it  were  apparently  de- 
pending on  a  multitude  of  small  investors  to  come  forward 
in  the  near  future  and  purchase  extensively  so  as  to  retire 
in  large  part  the  speculative  commitments  of  which  such  a 
large  volume  had  been  created,  particularly  in  the  closing 
weeks  of  the  year.  The  wholesale  absorption  of  entire  de- 
nominations of  stock  in  speculative  hands  was  no  longer 
to  be  prominent  in  the  protracted  speculative  movement 
which  endured,  with  some  halts,  throughout  the  greater 
part  of  the  decade,  as  it  had  been  in  the  earlier  years  of 
this  century.  Chiefly  to  individual  investors  had  the  specu- 
lators to  look  to  furnish  them  justification,  and  to  render 
their  operations  generally  and  finally  profitable. 

The  gradual  change  of  character  in  securities  which 
investors  bought  directly  from  bankers  was  one  very  strik- 
ing development  of  1905.  The  inferences  one  could  draw 
from  this,  either  as  to  the  quantitative  transformation  of 
investment  capacity  of  absorption  or  as  to  the  general  de- 
mand for  increased  returns  on  invested  funds,  were  not 
clearly  evident  even  at  the  close  of  the  year.  How  far  the 
change  possessed  importance  only  for  bankers  and  others 
interested  in  putting  forth  whole  issues  of  new  securities, 


43]  CHANGING  CONDITIONS  OF  INVESTMENT  43 

instead  of  bearing  on  the  general  strength  of  the  effective 
investors'  demand,  might  have  been  regarded  as  an  open 
question. 

Speculation  was  still  conducted  as  if  the  omnivorous 
and  extensive  investing  class  were  present  as  it  had  seemed 
to  be  in  1904.  The  general  course  of  prices  during  the 
year  would  not  in  itself  lead  us  to  conclude  that  general 
assumptions  as  to  the  extent  of  the  investing  power  of 
absorption  were  wholly  erroneous.  It  yet  remained  to  be 
seen  at  the  close  of  1905  whether  investors  generally 
formed  as  numerous  and  well  equipped  a  class  as  in  the 
latter  part  of  1904,  and  whether  perhaps  they  would  be  so 
desirous  of  higher  rates  of  return  that  they  w^ould  turn  to 
stocks  in  which  dividend  increases  seemed  imminent,  rather 
than  purchase  largely  of  bond  issues  bearing  relatively  low 
rates  of  interest.  Of  course  also,  the  expected  extensive 
and  substantial  increases  of  dividends  might  not  be  forth- 
coming. 

The  year  in  the  New  York  securities  market  was  charac- 
terized by  large  aggregate  issues  of  new  securities,  as  was 
the  year   1904.     But.  whereas  the  investment  capacity  in 

1904  to  absorb  any  quantity  of  good  bonds,  bearing  low 
rates   of    interest,    seemed   unrestricted,    and   although    in 

1905  it  might  not  have  been  asserted  with  assurance  that 
the  limits  of  the  investors'  capacity  in  that  direction  had 
been  reached;  the  appearance  of  4^  per  cent,  bonds — put 
forth  by  the  Japanese  government  and  by  industrial  com- 
panies— and  the  refusal  of  the  Pennsylvania  Railroad's 
stockholders  to  subscribe  at  par  for  more  than  10  per  cent, 
of  a  proposed  issue  of  y/2  per  cent,  bonds,  together  pointed 
to  a  more  fastidious  or  restricted  investors'  demand. 
.\nd.  if  continuous  investment  purchases  and  consequent 
withdrawals  of  stocks  from  speculators  were  not  the 
main  supports  of  the  sustained  rising  movement  on  the 


44  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [44 

Stock  Exchange — we  have  little  direct  evidence  on  this 
point — such  action  by  investors  did  not  avail,  in  April  and 
in  some  other  months,  to  prevent  a  sharp  and  continuous 
general  fall  of  prices  on  the  Stock  Exchange. 

During  1905,  there  occurred  some  striking  signs  of  the 
demand  of  investors  for  higher  income  returns  from  their 
investments.  The  excessive  subscriptions  for  the  Ameri- 
can allotments  of  the  Japanese  loans — bearing  interest  at 
the  rate  of  4)^  per  cent,  and  sold  far  below  par — pointed 
to  the  features  which  now  appealed  to  large  numbers  of 
prospective  investors.  The  latter  either  had  ceased  to  lay 
so  much  stress  on  security  alone  as  they  had  formerly  done, 
regardless  of  the  rate  of  income  return ;  or  else  they  thought 
that,  in  this  new  economic  era,  security  could  be  taken  for 
granted  and  income  return  might  be  constituted  the  chief 
object  of  their  attention.  At  any  rate,  the  traditional  at- 
titude of  investors,  which  had  been  well-nigh  crystallized  in 
the  frequent  crises  and  depressions  of  greater  or  less  extent 
and  duration  in  the  two  closing  decades  of  the  nineteenth 
century,  was  undergoing  a  decided  change  during  1905. 
There  were  still  many  investors  who  would  buy  long-term 
4  per  cent,  railroad  bonds — of  this  there  was  plenty  of  evi- 
dence in  the  number  of  such  issues  put  forth  during  1905. 
But  there  was  by  no  means  an  unlimited  number  of  such 
investors.  Toward  the  end  of  the  year,  the  output  of  the 
traditional  issues  just  mentioned  had  almost  ceased. 

To  the  presence  of  investors  as  the  necessary  final  sup- 
port of  the  market  no  closer  attention  was  given  by  specu- 
lators generally  than  had  ever  been  given.  The  cessation 
of  large  issues  of  bonds  through  banking  houses  and  the 
earlier  change  in  the  character  of  such  securities  as  were 
put  forth,  pointed  to  the  growing  difficulty  of  attractin^^ 
investors.  Bonds  of  the  best  character,  possessing  hovv- 
ever  slight  attraction  in  the  way  of  large  returns,  could 


45]  CHANGING  CONDITIONS  OF  INVESTMENT  4- 

hardly  be  sold  even  with  the  employment  of  every  device 
and  facility  at  the  command  of  experienced  bankers.  There 
seemed  little  to  attract  investors  to  active  stocks  listed  on 
the  Stock  Exchange,  in  view  of  the  relatively  high  prices 
to  which  they  had  been  advanced  in  the  speculative  market 
and  the  consequent  low  income  rates  they  offered  the  pros- 
pective investor.  Of  course  many  stocks,  in  which  specu- 
lation was  active,  held  out  promises  of  paying  higher 
dividends  than  they  were  yielding  at  the  close  of  1905.  In 
December  of  that  year,  the  continuous  prosperity  enjoyed 
generally  by  railroads  and  most  branches  of  industr}^  for 
the  greater  portion  of  the  preceding  two  years,  seemed  to 
vv-arrant  the  belief  that  a  general  rise  in  dividend  rates 
would  shortly  ensue.  The  enhanced  attractions  to  inves- 
tors, resulting  from  higher  dividends,  would  lead,  it  w^as 
assumed,  to  heavy  purchases  by  persons  to  whom  income 
yield  was  the  primary  consideration.  That  the  investing 
class,  upon  whom  dependence  was  placed  to  purchase  the 
stocks  at  relatively  high  prices,  had  ability  of  indefinite 
extent  to  purchase  any  stocks  which  might  appeal  to  them, 
was  also  assumed.  The  influences,  to  which  speculators 
seemed  most  responsive,  were  those  connected  with  the  fac- 
tors which  had  to  do  with  the  respective  earning  powers 
of  the  various  corporations  and  the  likelihood  that  stock- 
holders would  share  directly  in  the  increased  profits  which 
those  corporations  might  obtain  from  their  operations  in 
times  of  prosperity.  That  investors  desired  higher  income 
returns  was  the  belief  that  finally  guided  the  vast  body  of 
speculators  on  a  small  scale  who  followed  the  market  in 
the  last  few  weeks  of  1905 ;  the  changing  character  of  bond 
issues  served  to  strengthen  this  belief.  The  current  re- 
ports of  corporate  earnings,  furthermore,  went  to  encour- 
age the  expectation  that  higher  dividends  would  be  paid. 
Then,  it  was  tacitlv  assumed,  with  the  demands  of  investors 


46  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [46 

for  increased  income  met  by  the  general  raising  of  divid- 
ends, there  would  be  a  general  withdrawal  by  investors  of 
stocks  from  the  hands  of  the  speculative  class  which  had 
carried  them  through  the  period  of  uncertainty  as  to  earn- 
ings and  dividends. 

The  character  of  the  investment  demand  was  thus  im- 
plicitly understood  by  speculators  for  the  rise.  The 
strength  and  extent  of  that  demand  were  apparently  thought 
to  be  limitless.  The  difficulty  of  putting  out  many  bond 
issues  during  1905 — if  speculators  regarded  it  at  all — was 
interpreted  apparently  as  arising  from  the  change  in  in- 
vestors' wants,  not  from  a  possible  narrowing  of  the  in- 
vestors' ability  to  purchase  securities  which  might  be  de- 
sirable to  them — or  which  speculators  thought  should  be 
desirable  to  them.  The  continued  expansion  of  prosperity 
appeared  inevitable,  and  so  likewise  did  the  substantial 
distribution  of  dividends  as  a  result  of  this  abounding  pros- 
perity. The  actual  capacity  of  the  investing  class  for  ab- 
sorbing the  increasingly  desirable  railroad  and  industrial 
stocks  was  never  made  the  subject  of  investigation  or  even 
of  the  most  perfunctory  inquiry.  And  yet,  the  high  call 
rates  quoted  so  frequently  from  September  until  the  close 
of  1905.  and  the  growing  difficulty  of  marketing  bond 
issues  through  bankers,  together  with  the  sustained  in- 
tensity of  speculation,  might  fairly  have  been  regarded  as 
concurrent  indices  of  a  large  general  volume  of  speculative 
commitments  for  the  rise,  out  of  all  proportion  to  the  ag- 
gregate investment  demand,  on  which  speculation  for  the 
rise  depended  for  its  ultimate  success  and  justification ;  or 
else  of  commitments  undertaken  at  a  much  more  rapid  rate 
than  that  with  which  investment  buying  could  keep  pace. 

Speculation  for  the  rise,  it  was  recognized  clearly  enough 
as  the  year  1905  drew  to  a  close,  had  been  entered  upon 
most  extensively.     But  the  straitened  money  market  could 


47]  CHANGING  CONDITIONS  OF  INVESTMENT  47 

have  been  regarded,  not  necessarily  as  foreshadowing  the 
ultimate  discomfiture  of  speculators  on  the  long  side;  it 
could  also  have  been  considered  evidence  of  investors'  hold- 
ing off  until  the  generally  increased  dividends,  to  which 
speculators  contidently  looked  forward,  became  assured 
When  these  dividends  should  actually  be  declared,  then  it 
was  thought  swarms  of  investors  would  purchase  in  suffi- 
cient amounts  the  stocks  with  which  speculators  were  loaded 
to  relieve  the  latter  of  their  burdens.  This  expected  action, 
which  it  was  assumed  investors  would  eventually  take, 
serves  to  explain,  in  large  part,  the  rising  prices  and  active 
speculation  based  on  still  higher  prices  which  prevailed  in 
the  face  of  the  high  rates  for  call  money  with  which  much 
of  the  speculation  was  financed. 

During  1905  speculation  on  the  long  side  had  been  suc- 
cessful on  the  whole.  The  higher  prices  of  speculative 
stocks,  which  were  so  generally  attained  in  the  course  of 
the  year,  had  presented  powerful  inducements  to  that  large 
class  which  was  ready  to  enter  into  stock  market  ventures, 
equipped  with  funds  sufficient  for  the  required  initial  mar- 
gins and  undeterred  by  conscientious  scruples  as  to  the 
righteousness  of  speculation.  From  the  viewpoint  of  this 
class,  the  rise  of  prices,  which  had  gone  along  with  growing 
prosperity  in  1903,  seemed  likely  to  continue  in  1906.  since 
everything  pointed  to  a  still  higher  degree  of  business  pros- 
perity (luring  the  later  year.  By  December,  1905,  accord- 
ingly, a  large  portion  of  that  class  which  could  be  attracted 
to  the  stock  market,  entered  into  it  in  the  expectation  of 
the  higher  prices  which  were  looked  for  in  1906 — the  higher 
prices  which,  presumably,  a  large  class  of  investors  would 
be  willing  to  pay  for  the  stocks  favored  in  1905  by  specu- 
lators. 

The  strain  in  the  money  market  was  clearly  evident  at 
the  close  of  1905.     But  on  individual  speculators  this  strain 


48   SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [48 

did  not  bear  directly.  If  some  few  brokers  had  to  pay,  on 
some  of  their  loans  for  a  few  days,  the  inordinately  high 
rates  of  interest  indicated  by  the  maximum  call  rates  in  the 
closing  days  of  the  year,  they  could  not  charge  all  their  cus- 
tomers with  interest  at  the  same  rates.  And,  moreover,  the 
brokers  were  not  all  paying  those  excessive  rates.  The  pro- 
nounced stringency  of  the  money  market  was  little  regarded 
among  the  considerations  affecting  general  speculative 
policy  on  the  Stock  Exchange.  In  view  of  the  higher  prices 
expected  early  in  1906,  along  with  the  increased  desirabil- 
ity of  railroad  and  industrial  stocks,  the  temporary  incon- 
venience of  high  rates  for  call  money  in  December,  even 
with  the  disquieting  inferences  that  could  be  drawn  from 
them,  was  ineffective  in  restraining  the  entrance  of  specu- 
lators into  the  market  or  in  preventing  the  further  rise  of 
prices.  Thus  closed  the  year  1905,  with  speculators  carry- 
ing large  amounts  of  stocks,  and  with  difficulty  having  loans 
obtained  for  their  purposes;  but  the  shifting  of  those  stocks 
to  investors  was  expected  shortly  to  relieve  the  strain  of 
speculation  and  to  establish  the  final  success  of  speculation 
for  the  rise,  as  that  had  been  conducted  ever  since  the 
autumn  of  1904.  The  events  of  1906,  which  speculators 
had  undertaken  to  "  discount  ",  were  to  determine  the  gen- 
eral correctness  of  the  speculators'  assumptions,  on  which 
they  had  acted  in  1905. 


CHAPTER  IV 

Tendencies  Toward  Over-Speculation  :  Restricted 
Powers  of  Investment  Absorption — 

january june,  i906 

In  January,  1906,  was  recorded  a  volume  of  sales  on  the 
New  York  Stock  Exchange,  which  has  only  been  exceeded 
by  the  volume  of  one  other  month,  April,  1901 — the  month 
which  preceded  the  Northern  Pacific  comer  of  the  follow- 
ing May  9th.  This  heavy  volume  of  transactions  in  Janu- 
ary was  a  natural  accompaniment  of  the  sharp,  general  rise 
of  prices  during  the  month.  Whether  the  extensive  specu- 
lative activity  was  out  of  proportion  to  investment  buying, 
only  the  future  could  reveal.  Offhand  the  advance  of 
prices  might  have  been  ascribed  either  to  an  expansion  of 
speculative  purchases  or  of  investment  absorption.  Even 
at  the  close  of  the  month  there  was  no  striking  indication 
of  over-speculation.  To  be  sure,  the  rates  quoted  for  call 
money  at  the  Stock  Exchange  in  the  first  days  of  the  month 
were  noticeably  high,  so  that  there  was  indicated  a  volume 
of  speculative  purchases  which  temporarily  taxed  the  avail- 
able facilities  afforded  at  that  time  by  the  call  money 
market.  However,  a  possible  interpretation  of  the  con- 
currence of  these  high  rates  with  intense  speculative  activ- 
ity was  that  investment  absorption  was  rather  lagging  be- 
hind speculative  expectations  as  it  is  normally  supposed  to 
do.  After  the  first  business  week  the  high  call  rates 
were  not  again  in  evidence  during  January.  Throughout 
the  month,  in  fact,  there  were  no  unmistakable  signs  that 
49]  49 


^O  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [-q 

speculation  had  gone  too  far  in  anticipating  the  urgency 
and  amount  of  the  effective  investors'  demand. 

Early  in  February,  on  the  other  hand,  the  pronounced 
fall  of  prices  through  the  whole  list  showed  conclusively 
that  investment  absorption,  of  the  expected  strength,  had 
failed  to  retire  the  existing  large  volume  of  speculative 
commitments  for  the  rise.  The  inadequacy  of  investment 
absorption  could  have  been  ascribed,  with  the  knowledge 
then  obtainable,  either  to  the  actual  restriction  of  the  esti- 
mated investment  fund  or  to  the  lack  of  attractions,  in  in- 
vestors' eyes,  possessed  by  the  stocks  which  had  been 
bought  so  extensively  by  speculators.  The  latter  explana- 
tion presented  some  degree  of  plausibility  in  that  extensive 
and  general  increases  of  dividends,  for  which  speculators 
had  looked,  had  not  taken  place  in  January.^  And  if  in- 
vestment buying  was  proceeding  at  a  slow  rate  and  was  not 
exerting  itself  to  its  fullest  extent,  many  of  those  who 
had  ventured  into  commitments  for  the  rise  were  in  no 
position  to  hold  their  purchases  until  more  favorable  con- 
ditions developed. 

The  decline  of  prices  in  February  marked  the  first  of 
several  cul-de-sacs  into  which  speculators  were  destined  to 
thrust  themselves  during  1906.  The  events  of  January 
had  shown  that  there  was  no  inherent  virtue  in  speculation 
itself,  as  it  was  conducted  on  the  New  York  Stock  Ex- 
change, which  would  lead  it  to  adjust  the  volume  of  its 
opel-ations  closely  to  the  manifested  strength  of  the  invest- 
ment demand.  Like  all  the  sharp  general  declines  which 
occurred  in  1906.  that  of  February  was  accompanied  by 
the  expanding  prosperity  of  general  business,  both  in  this 
country  and  throughout  the  world.  There  was  fore- 
shadowed no  slackening  in  trade  activity  which  the  decline 

*  Commercial  and  Financial  Chronijcle,  Feb.   24,   1906,  p.  416. 


^l]         TENDENCIES  TOWARD  OVER-SPECULATION  51 

of  February  might  have  been  supposed  to  "  discount." 
Speculation,  on  the  scale  attained  in  January,  had  been  out 
of  all  proportion  to  the  revealed  power  of  investment 
absorption.  If  there  was  any  satisfactory  explanation  of 
February's  declines  in  the  stock  market,  other  than  the 
maladjustment  of  speculative  anticipation  and  investment 
buying  on  the  Stock  Exchange,  it  has  never  been  offered. 
At  a  later  point  we  shall  discuss  the  possibility  that  specu- 
lation went  too  far  in  its  anticipations. 

In  March  prices  rose  again,  either  in  response  to  fresh 
speculative  purchases  on  a  considerable  scale,  or  as  a  re- 
sult of  increased  investment  buying.  The  lack  of  con- 
formity between  speculative  operations  and  investment 
purchases  was  therefore  not  obvious,  as  it  had  appeared  to 
be  in  February;  and  the  extent  to  which,  in  the  earlier 
month,  speculation  had  gone  too  far  did  not  appear  to  have 
produced  permanently  harmful  results. 

Toward  the  end  of  March,  call  rates  attained  high  levels. 
As  is  the  custom  in  the  financial  district,  the  prevalence  of 
these  high  rates  was  generally  ascribed  to  the  need  for 
large  amounts  of  money  with  which  the  heavy  dividend 
and  interest  payments  of  April  ist  could  be  made.  Ac- 
companying the  rise  of  prices,  doubtless,  which  taxed  the 
available  facilities  of  the  money  market,  there  was  out- 
standing a  heavy  volume  of  speculative  commitments ;  but. 
on  the  other  hand,  there  should  have  been  a  return  to  lower 
call  rates  after  the  requirements  of  April  ist  had  been  met. 

The  expected  recurrence  of  relatively  low  call  rates  was 
not  observed,  however,  after  April  ist.  Maximum  quo- 
tations of  30  and  25  per  cent,  were  recorded  respectively 
in  the  first  two  weeks  of  the  month.  The  general  pre- 
valence of  high  rates  was  not  encouraging  to  speculative 
sentiment.  These  quotations  moreover  were  recorded  be- 
fore the  San  Francisco  fire  of  the  17th. 


52  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [52 

Following  the  disaster  in  San  Francisco  there  occurred 
a  steep  fall  of  prices  on  the  Stock  Exchange  and  the  move- 
ment of  currency,  in  large  amounts,  from  New  York  to 
the  Pacific  Coast.  Quite  aside  from  the  action  on  general 
sentiment  and  the  vague  consciousness  that  it  involved  an 
enormous  destruction  of  capital,  the  wholesale  destruction 
of  property,  if  it  was  proved  to  be  assignable  to  fire  rather 
than  to  seismic  causes,  meant  that  many  fire  insurance  com- 
panies would  not  only  be  eliminated  as  factors  in  the  pur- 
chase of  securities  for  some  time  to  come,  but  would  have 
to  sell  many  of  the  securities  in  which  their  reser\^e  funds 
had  been  invested.  The  prominence  of  the  San  Francisco 
fire  in  the  unfolding  of  events  on  the  Stock  Exchange 
marks  one  of  the  rare  occasions  on  which  operators  con- 
nected with  that  market  have  given  thought  to  conditions 
which  might  affect  the  extent  of  the  investment  demand. 

The  fall  of  prices  which  continued  through  April  was 
interrupted  in  May,  when  a  rise  set  in  along  with  a  con- 
siderable volume  of  transactions  on  the  Stock  Exchange. 
Whatever  immediate  or  remote  results  the  San  Francisco 
fire  might  bring  about — which  were  clearly  foreseen  and 
widely  discussed  in  April — they  did  not  serve  to  check  the 
rise  of  prices.  Even  after  the  events  of  April,  it  did  not 
appear  that  over-speculation  would  tend  to  go  unduly  far 
in  the  face  of  a  restricted  investment  demand. 

Again  in  June  recurred  the  fall  of  prices,  which  now 
seemed  to  have  become  a  phenomenon  revealing  itself  every 
other  month  in  the  stock  market.  But  the  decline  took 
place  at  the  same  time  that  much  fewer  shares  were  sold 
on  the  Stock  Exchange  than  in  the  preceding  month;  no 
extensive  liquidation  was  in  evidence  as  in  April.  On 
June  1st  the  legislation  imposing  restrictions  on  the  finan- 
cal  activities  of  New  York  life  insurance  companies,  in 
accordance  with  the  Armstrong  Committee's  recommenda- 


53]         TENDENCIES  TOWARD  OVER-SPECULATION  53 

tion  of  the  preceding  February,  went  into  effect.^  Pur- 
chases of  shares  of  any  stock  by  these  companies  were 
expressly  forbidden  in  the  future,  and  the  holdings  which 
the  companies  then  possessed  were  ordered  to  be  sold  with- 
in the  next  five  and  a  half  years.  Underwriting  participa- 
tions of  any  sort,  on  the  part  of  life  insurance  companies, 
were  likewise  forbidden.  Just  how  much  effect  this  legis- 
lation had  on  the  price  movements  on  the  Stock  Exchange 
during  June  may  be  indeterminate;  but  the  restrictions  on 
the  activities  of  life  insurance  companies  in  the  securities 
markets  were  regarded  at  the  time  as  significant. 

As  we  review  the  events  of  the  first  half  of  1906,  we 
can  see  indicated  the  absence  of  any  revealed  power  of  in- 
vestment absorption  to  retire  the  large  volume  of  specula- 
tive commitments  into  which  operators  on  the  Stock  Ex- 
change continually  tended  to  enter.  The  events  of  the  six 
months  did  not  show  that  this  combined  power  of  invest- 
ment buying  existed  to  the  extent  which  was  generally 
assumed.  No  check  appeared  to  have  exerted  itself  on 
over-speculation  except  the  temporary  exhaustion,  from 
time  to  time,  of  the  resources  of  the  speculators.  The 
first  half  of  1906  could  have  been  divided  into  three  cycles, 
each  consisting  of  two  successive  months.  In  one  of 
these  cycles,  the  first  month  was  characterized  by  rising 
prices,  the  second  by  falling  prices.  Thus,  while  in  Janu- 
ary, March  and  May,  prices  rose  appreciably,  they  fell  in 
February,  April  and  June.  Although  speculation  was 
carried  on  in  utter  ignorance  of  the  character  and  strength 
of  the  investment  demand,  it  seemed  to  possess  the  power 
of  restraining  itself  at  times  before  it  went  too  far  beyond 
the  extent  of  investment  absorption.  But,  on  the  other 
hand,  the  adjustment  of  speculation  to  the  needs  of  the 
market  was  accomplished  only  by  some  degree  of  liquida- 
tion on  the  part  of  over-extended  speculators. 

"^  Commercial  and  Financial  Chronicle,  May  5,  1906,  p.  1014. 


54  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [54 

In  spite  of  the  intermittent  advances  in  prices,  during 
March  and  May  particularly,  the  high  prices  of  January 
were  not  reached  again  in  the  succeeding  five  months.  We 
reproduce  a  table,  drawn  up  by  the  American  correspondent 
of  the  Economist,^  which  gives,  for  a  selected  list  of  stocks 
in  which  speculation  was  active,  the  highest  prices  of  the 
first  half-year  and  the  closing  prices  of  July  7th.  We  have 
added  a  column  of  differences  to  this  table  showing  the 
declines  severally  undergone  by  the  prices  of  these  stocks 
from  the  high  points  of  1906: 

Total  Declines 

Highest  Closing  Highest  of  1906 

1906.  July  7.    To  July  7,  1906. 

Atchison    96^  87-}^  —  g% 

Baltimore  &  Ohio    ii9^}4  ii73^  —  ^H 

Brooklyn  Rapid  Transit    94^  75  — 19% 

Canadian    Pacific    1/7^  I59^  —  ^714 

Delaware  &  Hudson   231  213^  — 17^ 

Erie     59%  4oH  —  t^qVs 

Great   Northern  preferred    348  296^  — 51^ 

Illinois  Central    184^  175%  —   8^ 

Louisville  &  Nashville   156^2  142^  —  14H 

Missouri    Pacific    106^  91%  —15^ 

New  York  Central  156^  130H  —  25^ 

Northern    Pacific    232^/4  202^  —  30^ 

Pennsylvania    147H  126^  —  21^ 

Reading    164  122^  — 4iJ4 

St.    Paul    193  174^  —iS'A 

Southern   Pacific     72%  655^  —   7% 

Union    Pacific    1691^  1443/^  —  25^ 

Amalgamated    Copper     ii8^4  99^4  — ^9 

American   Locomotive    78^  6y%  — 11^ 

American   Smelting    174  I45  — 29 

Colorado  Fuel  &  Iron   82 >^  49^  —32^ 

Pressed  Steel  Car   645^  46^^  —18^ 

Tennessee  Coal  &  Iron   165  143  — 22 

U.  S.  Rubber  58^  45  —  ^sVi 

U.   S.   Steel,  common    4^%  35^  —11!^ 

U.  S.  Steel,  preferred  113^  loi^  —  nH 


Economist,  July  21,  1906,  p.  1215. 


^^]         TENDENCIES  TOWARD  OVER-SPECULATION  55 

The  declines  set  forth  in  this  table  afford  evidence  as  to 
the  weakness  of  investment  absorption,  from  January  to 
June,  1906.  in  that  they  show  how  little  the  latter  availed 
to  withdraw  generally  from  the  hands  of  speculators  at 
relatively  high  prices  the  stocks  in  which  that  class  of 
traders  had  been  most  interested.  The  only  conclusive 
evidence  that  investment  absorption  had  exerted  itself,  to 
the  extent  which  was  assumed  to  be  possible,  would  have 
been  the  retirement  of  most  of  the  stocks  from  the  specu- 
lative section  of  the  market.  Speculators  might,  by  using 
the  supernatural  penetration  with  which  they  are  conven- 
tionally supposed  to  be  endowed,  have  estimated  with  ap- 
proximate correctness  the  actual  extent  of  resources  pos- 
sessed by  potential  investors,  even  though  data  for  that 
estimate  were  quite  lacking.  But  they  had  been  much  mis- 
taken in  the  estimate  of  the  urgency  of  investors'  desires 
to  purchase  largely  on  the  Stock  Exchange  at  the  highest 
prices  of  the  first  half-year,  the  events  of  which  made  this 
clearly  evident. 

The  course  of  trading  on  the  Stock  Exchange  has  just 
been  briefly  summarized,  for  the  first  half  of  1906.  It 
might  be  well  to  turn  now  to  the  consideration  of  evidence 
that  is  now  available — and  which  was  also  available  at  the 
close  of  June,  1906 — as  to  the  character  and  extent  of  the 
investment  demand.  Inquirv-  into  changes  occurring  in 
the  nature  of  the  investment  demand  can  best  be  conducted 
by  setting  forth  the  terms  on  which  certain  typical  security 
issues  were  offered  directly  to  investors — just  as  we  have 
done  in  the  case  of  issues  put  forth  in  1905. 

The  Pennsylvania  Company  in  January  sold  an  issue  of 
4  per  cent,  bonds,  amounting  to  $20,000,000,  to  a  large 
banking  firm;  these  bonds,  however,  had  only  25  years  to 
run.  The  Missouri,  Kansas  &  Texas  Railway  also  an- 
nounced an  issue  of  43/  per  cent,  general  mortgage  bonds, 


^6  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [56 

subject  to  the  authorization  of  its  stockholders,  to  be  sought 
at  a  later  date.  $10,000,000  of  these  bonds  were  to  be 
offered  to  stockholders  at  87^^.  The  interest  rate  and  the 
terms  of  the  offering  were  strongly  reminiscent  of  the 
Japanese  4^  per  cent,  loans  put  out  in  this  country  the 
preceding  year.  The  Westinghouse  Manufacturing  Com- 
pany presented  to  stockholders  the  privilege  of  subscribing 
to  an  issue  of  $15,000,000  convertible  gold  5s. 

In  February  the  result  of  New  York  City's  sale  of  $20,- 
000,000  50-year  4  per  cent,  bonds  by  public  bidding  en- 
gaged the  attention  of  financial  writers.  For  many  years 
previous,  the  City  had  been  able  to  borrow  at  3^^  per  cent, 
or  less.  But  since  an  issue  of  outstanding  3^s  was  quoted 
in  the  market  at  98,  it  was  thought  best  to  have  the  new  issue 
bear  interest  at  4  per  cent.  The  price  obtained  for  the 
bonds  was  108.052,  which  meant  that  the  city  borrowed  the 
money  at  3.65  per  cent.  This  compared  with  the  rates  at 
which  some  prior  issues  had  been  put  forth,  as  follows :  * 

Rate  of  Interest  Paid  by  City. 
Date  of  Issue.  %. 

Nov.,  1905   3-4997 

Apr.,   1905    347 

Nov.,  1904   3-40 

May,   1903    332 

May,   1902   3233 

Feb.,    1902    3-194 

On  the  surface  the  significance  of  the  bare  data  given 
above  appeared  to  lie  in  a  gradual  decline  in  New  York 
City's  credit.  But  other  interpretations  of  the  relatively 
unfavorable  terms  of  the  issue  were  suggested,  notably  the 
fact  that  ''  the  supply  was  greater  than  the  demand  ",''  so 
far  as  issues  of  general   investment  securities  were  con- 

*  Commercial  and  Financial  Chronicle,  Feb.  24,  1906.  p.  421. 

*  Economist,  Mar.  3,  1906,  p.  356. 


c^j]         TENDENCIES  TOWARD  OVER-SPECULATION  57 

cerned.  This  bond  sale  possesses  much  more  significance 
when  it  is  compared  with  one  in  the  following  summer,  with 
regard  to  the  respective  results. 

The  Boston  &  Maine  Railroad,  in  ]\Iarch,  sold  to  a 
syndicate  of  Boston  bankers  $10,000,000  20-year  deben- 
tures, bearing  4  per  cent,  interest;  the  proceeds  of  the  sale 
were  to  be  used  for  refunding  certain  maturing  securities 
of  subsidiary  roads. ^  Kansas  City  &  Southern  Railway 
stockholders  authorized  an  issue  of  $10,000,000  4j^  per 
cent.  20-year  bonds.  $6,000,000  of  these  were  to  serve  as 
collateral  security  for  $5,100,000  5  per  cent.  6-year  notes, 
to  which  stockholders  were  permitted  to  subscribe  at  95. 

These  issues  named  above,  put  forth  in  the  first  three 
months  of  the  year,  are  fairly  representative  of  the  securi- 
ties which  the  financial  advisers  of  corporate  enterprises 
thought  best  fitted  to  attract  investors  at  that  time.  We 
shall  bring  forw'ard  two  more  examples  of  large  security 
issues,  put  out  respectively  by  the  Pennsylvania  Railroad 
and  the  Pennsylvania  Company;  one  is  significant  in  the 
method  by  which  it  was  floated,  the  other  in  its  magnitude 
and  the  character  of  the  security  by  which  it  was  repre- 
sented. The  Pennsylvania  Railroad  loan,  amounting  to 
$50,000,000,  was  offered  to  French  investors,  on  terms 
which  made  it  bear  3)4  per  cent,  interest.  The  country 
to  which  recourse  w^as  had  for  obtaining  this  loan  ap- 
peared to  open  up  a  new^  field  for  the  sale  of  other  Ameri- 
can security  issues.  But  it  was  pointed  out  at  the  time 
that  the  accumulated  taxes  imposed  by  the  French  govern- 
ment on  foreign  securities  would  narrowly  limit  the  market 
France  could  offer  to  American  stocks  or  bonds."  In  any 
case  this  particular  outlet  for  new  issues  of  securities  was 

'  Commercial  and  Financial  Chronicle,  Mar.  10,  1906,  p.  567. 
''/did.,   May  26,  1906.  p.  T177. 


^8   SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [58 

not  employed  to  any  extent  at  that  time  except  in  the  one 
instance  mentioned. 

The  Pennsylvania  Company  put  out  an  issue  of  18-month 
4^  per  cent,  notes,  amounting  to  $50,000,000.  These  it 
sold  to  its  bankers  at  a  price  slightly  less  than  par.  This 
was  the  first  instance  in  1906  of  an  issue  of  short-term 
notes  in  any  large  amount;  they  became  quite  common  the 
next  year.  This  same  company  in  January  had  been  able 
to  sell  $20,000,000  4  per  cent,  bonds,  running  25  years,  to 
a  banking  firm  which  presumably  was  able  to  dispose  of  the 
securities  in  question  to  investors  with  more  or  less  readi- 
ness. But  the  passing  of  the  4  per  cent,  bond,  as  a  readily 
marketable  form  of  new  security,  which  seemed  indicated 
in  May,  was  betokened  more  strikingly  in  the  following 
month,  by  the  reported  failure  to  underwrite  successfully 
the  $24,000,000  4  per  cent,  bonds  of  the  Chicago,  Burling- 
ton &  Quincy  Railroad,  Illinois  Division — an  issue  which 
had  been  advertised  as  an  offering  to  investors  in  June 
of  the  preceding  year,  merely  as  a  routine  financial  under- 
taking.^ The  rumored  ill-success  of  this  underwriting  pro- 
voked a  lengthy  comment  from  the  Commercial  and  Finan- 
cial Chronicle  on  "Apathetic  Investment  Markets  and  the 
Causes."  ^  We  need  not  take  the  "  causes  "  given  too 
seriously;  they  consisted  almost  solely  in  the  limitations 
imposed  by  legislation  on  the  investing  and  underwriting 
activities  of  the  life  insurance  companies.  But  the  notice 
accorded  the  restricted  character  of  the  investment  demand 
for  bonds  is  significant  in  itself,  to  whatever  causes  the 
restriction  may  have  been  ascribed.  Not  only  in  the  cases 
of  those  securities  which  bankers  and  corporations  offered 
directly  to  investors,  was  the  restricted  demand  of  inves- 

»  Commercial  and  Financial  Chronicle,  June  24,  1905,  p.  2620. 
^  Ibid.,  June  30,  1906,  p.  1468. 


59]         TENDENCIES  TOWARD  OVER-SPECULATION  59 

tors  obvious.  In  the  open  market  of  the  Stock  Exchange, 
where  speculators  supposedly  were  intervening  in  the  sale 
of  stocks  to  investors,  the  long-continued  declines  in  the 
prices  of  many  active  stocks  from  the  high  levels  of  Janu- 
ary, along  with  heavy  volume  of  transactions,  proved  that 
investors  had  not  absorbed  the  floating  supply  of  stocks  in 
which  speculation  was  active  during  the  first  half  of  1906. 
This  inadequacy  of  the  investment  absorption  had  been  ap- 
parent as  early  as  February,  in  the  first  general  decline  of 
the  year.  Of  course  the  failure  of  investors  in  general 
to  absorb  many  denominations  of  stocks  at  the  high  prices 
of  January  and  early  February,  or  even  at  prices  much 
below  them,  might  have  been  ascribed  to  the  investors'  dis- 
inclination, as  much  as  to  their  inability,  to  purchase  largely. 
Moreover,  the  increasingly  onerous  terms — to  the  issuing 
corporations — on  which  new  security  issues  were  put  forth 
in  the  earlier  months  of  1906,  might  at  the  time  have  been 
laid  to  the  world-wide  increase  in  interest  rates.  This 
phenomenon  has  been  marked  in  recent  years — ever  since 
1904  indeed — as  one  of  prolonged  duration.  It  was  es- 
pecially prominent  in  the  general  activity  of  industry  and 
commerce  which  characterized  1906.  The  rise  in  nominal 
interest  rates,  borne  by  new  securities,  and  the  shorter  lives 
of  the  obligations,  bearing  fixed  rates  of  interest,  could 
all  be  explained  plausibly  by  the  general  rise  of  interest 
rates.  Whether  the  investors,  who  were  clamoring  for 
increased  rates  of  return  on  their  investments,  would  event- 
ually display  the  power  or  inclination  to  retire  speculative 
commitments  to  any  considerable  extent,  was  highly  un- 
certain. 

During  June  three  increases  of  dividends  were  an- 
nounced :  on  Baltimore  &  Ohio  from  a  5  to  a  6  per  cent, 
basis,  and  the  same  increase  on  Amalgamated  Copper, 
while,  on  American  Locomotive  common,  an  initial  divid- 


6o  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [60 

end,  at  the  rate  of  2  per  cent.,  was  announced.  These 
were  the  only  instances  of  dividend  increases  between  Feb- 
ruary and  July — at  least  in  the  more  prominent  stocks 
favored  at  the  time  by  speculators.  It  might  still  have  been 
asserted  then  that  investors  were  not  attracted  by  stocks 
on  which  returns  to  their  holders  were  not  in  proportion  to 
the  prosperity  generally  and  severally  enjoyed  by  the  cor- 
porations represented  by  stocks  listed  on  the  Stock  Ex- 
change. The  extent  of  the  prosperity  and  its  wide  dif- 
fusion among  various  railroads,  were  displayed  in  a  table 
drawn  up  by  the  American  correspondent  of  the  Econom- 
ist,^^ setting  forth  the  increased  gross  earnings  of  18  rail- 
roads— in  this  country  and  in  Canada — which,  in  the  cases 
of  individual  roads,  had  amounted  to  more  than  $1,000,000, 
for  the  half-year  ending  June  30,  1906,  as  compared  with 
the  corresponding  half-year  of  1905. 

INCREASE  IN    GROSS  EARNINGS  FOR  THE  FIRST   HALF  OF   I906  OVER   I905. 

Canadian  Pacific  R.  R $6,946,727 

Northern  Pacific,  Transcontinental   5,301,871 

Baltimore  &  Ohio,  Soft  Coal  Road  4.831,672  ^^ 

Great  Northern  System,  Transcontinental  4,542,007 

Southern  Railway   3,697,429 

New  York  Central   3,689,661 

Louisville  &  Nashville  2,725,371 

Illinois  Central   2,490,076 

Lake  Shore  &  Michigan  Southern  2,440,152 

Missouri  Pacific,  General  Division  2,040,186 

Michigan    Central    1,891.983 

Grand  Trunk  System  1,669,692 

Denver  &  Rio  Grande  1,469,361 

Wabash  Railway    i,443.i45 

Minneapolis,  St.  Paul  &  Saulte  Ste.  Marie i,373,070 

Cleveland,  Cincinnati,  Chicago  &  St.  Louis  1,131,495 

Canada   Northern    1.096,800 

Colorado   &   Southern    1,086,524 

Total    $49,867,222 

'0  July  28,   [906.  p.  1258.  ^^  Five  months. 


6i]         TENDENCIES  TOWARD  OVER-SPECULATION  6l 

The  tacit  assumption  of  speculators  in  1906  that  in- 
vestment buying — quite  unsolicited  and  arising  merely  as 
a  result  of  the  wide  diffusion  of  general  prosperity  — 
would  ultimately  act  to  relieve  speculative  interests  of  the 
burden  of  their  commitments  seems  to  have  been  quite 
obviously  unfounded,  and  to  have  been  so  regarded  by  the 
end  of  June.  And,  even  if  a  general  rise  of  dividends 
throughout  the  stocks  listed  on  the  Stock  Exchange  were 
to  take  place,  it  was  by  no  means  certain  that  complaisant 
investors  possessed  aggregate  funds  sufficient  to  purchase 
the  floating  supply  of  stocks  which  were  either  held  for 
speculators'  accounts  or  were  incessantly  passing  from  the 
hands  of  one  speculator  to  another.  In  1905  it  had  be- 
come fairly  evident  that  purchases  by  corporations  of 
large  blocks  of  stock  in  other  companies  would  no  longer 
be  the  relatively  common  event  it  had  been  in  the  preceding 
few  years.  Institutional  or  corporate  activity  in  outright 
buying,  as  a  means  of  relief  to  over-extended  speculators, 
was  further  limited  by  the  San  Francisco  fire  and  by  the 
elimination  of  the  life  insurance  companies  from  the  stock 
market  as  a  result  of  legislative  enactment,  to  which  we 
have  referred.  Any  "  anticipation  of  the  needs  of  the 
market  ",  which  speculators  might  undertake  would  refer 
to  the  wants  of  the  body  of  individual  investors.  Moder- 
ate rises  of  prices,  accompanied  by  a  relatively  light  volume 
of  speculation,  as  in  March,  had  manifested  an  over- 
estimate of  the  investors'  inclination  or  power  to  purchase 
on  a  large  scale  during  a  brief  period.  Even  this  slight 
volume  of  speculation  for  the  rise  in  March  had  been  fol- 
lowed by  strained  conditions  in  the  money  market  and  a 
certain  amount  of  unwilling  liquidation — even  before  the 
San  Francisco  fire  on  the  17th  of  the  following  month. 

If  speculators  generally  had  any  illusions  as  to  the  num- 
bers and  resources  of  the  expectant  investors,  bankers  and 


62   SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [62 

corporations  which  had  to  put  forth  securities  during  the 
early  months  of  1906  displayed  in  their  actions  little  share 
or  part  in  those  illusions.  The  terms  on  which  most  new 
securities  w'ere  issued  implied  not  only  a  recognition  of  the 
general  rise  of  interest  rates,  but  also  of  a  restricted  in- 
vestment class  which  needed  much  stronger  inducements  to 
attract  its  bids  for  new  securities  than  had,  for  example, 
the  investors  in  the  last  few  months  of  1904. 


CHAPTER  V 

Over-Speculation  and  Liquidation  on  a  Large  Scale — 

july,  1906 march,  i907 

Speculative  activity,  denoted  by  the  monthly  record  of 
sales  on  the  Stock  Exchange,  reached  its  lowest  level  for 
any  month  of  1906  in  July.  Few  more  than  16,000,000 
shares  were  sold.  In  the  middle  of  the  month  prices  gen- 
erally began  to  display  a  rising  tendency;  so  that  in  the 
second  half-year  there  started  apparently  another  of  the 
two  months'  cycles  in  price  movements  which  had  been 
characteristic  of  the  first  half-year.  The  course  of  prices 
and  of  call  rates,  at  any  rate,  appeared  to  show  that  specu- 
lation was  adjusting  itself  and  keeping  its  operations  with- 
in the  bounds  set  by  the  investment  demand. 

Further  evidence  as  to  the  restricted  character  of  the 
general  investment  demand  was  furnished  in  July  by  the 
outcome  of  a  bond  sale  by  the  Comptroller  of  New  York 
City.  This  official  attempted  to  dispose  of  $12,500,000  4s 
by  public  sale.  Only  $1 1,029,100  of  these  bonds  were  sold. 
The  average  price  obtained  made  the  interest  rate  paid  by 
the  city  3.94  per  cent.  This  compared  with  an  interest 
rate  of  3.65  per  cent,  on  the  $20,000,000  issue  sold  in 
February — a  rate  that  was  considered  unfavorably  high  at 
the  time  of  the  earlier  sale. 

The  relatively  onerous  terms  on  which  alone  New  York 
City  was  able  to  borrow  less  than  $12,000,000,  afforded  a 
further  indication  of  the  restrictions  on  the  investment  de- 
mand which  were  acting  in  July  as  in  the  preceding  months. 
63]  63 


64  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [64 

Whether  the  assumed  timidity  of  investors — so  far  as  rail- 
road securities,  even  of  the  highest  character,  were  con- 
cerned— would  apply  also  to  New  York  City  bonds,  because 
of  the  many  new  regulative  enactments  by  the  states  and 
the  federal  government — a  sequence  of  cause  and  effect 
indicated  by  some  financial  writers  ^  —  may  perhaps  be 
questioned.  But  the  considerations  which  kept  investors 
from  bidding  in  large  numbers  for  these  bonds  unquestion- 
ably operated  in  the  same  way,  though  not  to  the  same  ex- 
tent, as  they  had  done  in  the  case  of  the  Chicago,  Burlington 
&  Quincy  4s;  the  latter  we  have  already  mentioned  as  an 
issue  which,  as  had  been  announced  the  preceding  month, 
had  brought  losses  upon  its  underwriters.  The  invest- 
ment demand,  for  reasons  about  which  it  is  well  not  to  be 
dogmatic,  was  highly  restricted,  so  far  as  it  applied  to  4 
per  cent,  bonds,  either  of  railroads  or  of  New  York  City. 
By  inference  there  seemed  little  ground  for  assuming  that 
the  investment  demand  for  stocks  paying  steady  dividends 
was  practically  limitless,  even  under  the  most  favoring  con- 
ditions. The  result  of  the  bidding  for  the  first  issues  of  4 
per  cent,  bonds  New  York  City  had  put  out  in  many  years, 
pointed  to  a  limited  investors'  demand — just  as  the  New 
York  life  insurance  legislation  and  the  heavy  losses  thrown 
upon  fire  insurance  companies  by  the  San  Francisco  fire, 
pointed  to  positive  restrictions  which  had  been  placed  upon 
the  absorptive  capacity  of  investors  generally.  However, 
a  superficial  consideration  of  the  difficulties  encountered  in 
marketing  4  per  cent,  bonds,  railroad  or  municipal,  might, 
in  the  early  summer  of  1906,  have  led  to  the  conclusion 
that  the  general  demand  of  investors  was  for  higher  returns 
than  4  per  cent,  on  their  investments.  Tf  the  dividends 
on  stocks,  in  which  transactions  day  after  day  on  the  Ex- 

^  Commercial  and  Financial  Chronicle,  July  28,  1906,  p.  180. 


^^]  OVER-SPECULATION  AND  LIQUIDATION  65 

change  were  especially  heavy,  were  raised  substantially,  it 
might  have  been  argued,  investors  with  ample  funds  might 
be  attracted  in  sufficiently  large  numbers  to  take  out  of 
speculative  hands  the  stocks  which  had  been  subject  to  so 
much  uncertainty  as  to  their  investment  value. 

Still  clinging  to  this  expectation  apparently,  speculators 
passed  through  July;  the  volume  of  their  transactions  was 
not  relatively  large,  but  prices  rose  generally.  After  the 
first  few  days  of  the  month,  when  a  call  rate  of  8  per  cent- 
was  quoted,  the  range  covered  was  from  i^  to  3  per  cent 
On  the  last  day  of  the  month  the  quotations  lay  within  the 
narrow  compass  of  2^  and  2j^  per  cent.  And  on  this 
last  day  the  directors  of  the  United  States  Steel  Corpora- 
tion, by  declaring  a  dividend  of  ^  of  one  per  cent,  for 
each  quarter  of  the  current  year,  put  the  common  stock  of 
that  company  back  on  a  2  per  cent,  dividend  basis.  In 
spite  of  the  disquieting  indications  of  the  New  York  City 
bond  sale,  it  appeared  in  July  as  if  speculation  for  the  rise 
and  investment  absorption  were  adjusting  themselves  to 
each  other  more  closely  than  they  had  done  in  the  first  half 
of  1906.  The  decreased  volume  of  sales  on  the  Stock 
Exchange — which  may  be  taken  as  a  rough  measure  of 
speculative  activity — the  restoration  of  dividends  on  a  stock 
in  which  speculation  had  been  heavily  concentrated,  the 
prevalence  of  low  call  rates,  and  the  general  rise  of  prices, 
all  betokened,  on  the  surface,  a  decreasing  tendency  on  the 
part  of  speculative  commitments  to  outstrip  the  possibilities 
of  investment  buying. 

The  month  of  August  opened  with  the  declaration  of 
resumed  dividends  on  Steel  common  and  an  immediately 
preceding  month  of  rising  prices  still  fresh  in  speculators' 
minds.  Prices  continued  on  their  upward  course  through- 
out the  first  ten  days  or  so,  with  some  slight  interruptions. 
Along  with  the  continuation  of  the  rise  went  a  degree  of 


66  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [66 

speculative  activity  somewhat  more  intense  than  it  had  been 
during  July.  From  August  ist  to  the  i6th  inclusive,  a 
period  embracing  fourteen  business  days,  11,198,478  shares 
were  sold  on  the  Stock  Exchange.  If  this  rate  of  activity 
had  been  maintained  throughout  the  rest  of  the  month, 
sales  for  August  would  have  amounted  to  slightly  more 
than  20,000,000  shares — not  an  excessive  number,  as  rec- 
ords of  sales  had  been  regarded  in  the  preceding  months 
of  1906.  Over-speculation  in  the  first  half  of  August,  if 
it  was  in  operation,  was  not  conspicuous.  The  announced 
resumption  of  dividends  on  Steel  common  was  one  of  the 
favorable  events  which  speculators  had  been  engaged  in 
''  discounting  "  for  some  time.  The  tone  of  the  reception 
given  that  announcement  by  the  market  was  distinctly 
good;  but  it  is  uncertain  whether  the  ''buoyancy"  mani- 
fested proceeded  from  speculators,  w^ho  assumed  that  the 
volume  of  investment  buying  would  increase  as  a  result  of 
the  resumed  dividends,  or  from  investors  who  saw  a  pros- 
pect that  other  such  actions  on  dividends  would  be  taken 
in  the  near  future. 

Call  rates  remained  at  a  moderate  level  during  the  first 
half  of  August.  On  only  one  day,  the  9th,  was  the  rate 
as  high  as  5  per  cent. ;  and  the  minimum  of  2  per  cent,  was 
frequently  quoted.  These  rates,  it  should  be  borne  in 
mind,  were  quoted  in  August  when  the  interior  demands 
on  New  York  for  crop-moving  funds  usually  begin  to  be 
felt.  Nevertheless  the  relatively  low  level  of  rates  ac- 
companied the  first  signs  of  the  crop-moving  demands  and 
moderately  active  speculation. 

August  17th  marked  the  beginning  of  the  second  part 
of  the  month  which  was  sharply  distingtiished  from  the 
first  part  in  the  course  of  prices  and  in  speculative  ac- 
tivity. On  that  day  the  declarations  of  dividends  on  Union 
Pacific  and  Southern  Pacific  were  announced  by  their  re- 


^'^-^  OVER-SPECULATION  AND  LIQUIDATION  67 

spective  boards  of  directors.  The  rate  of  Union  Pacific's 
dividend  was  raised  from  6  to  10  per  cent,  and  that  of 
Southern  Pacific  resumed  at  the  rate  of  5  per  cent.  Along 
with  the  pubHshed  declaration  of  these  dividends  there 
was  an  immediate  outburst  of  wild  speculative  activity. 
On  the  1 6th  sales  for  the  day  had  amounted  to  1,220,068 
shares.  They  attained  a  total  of  2,529,422  shares  on  the 
17th.  During  the  week  of  six  business  days  following  the 
17th,  10,527,161  shares  were  sold  on  the  Stock  Exchange. 
In  the  thirteen  business  days  of  that  part  of  August  which 
included  and  followed  the  17th,  20,606,418  shares  were 
sold.  During  the  entire  month  sales  of  31,804,816  shares 
made  up  a  monthly  total,  which  had  only  been  exceeded  in 
two  months  of  1901 — April  and  May — in  October,  1904, 
and  in  January,  1906. 

During  the  week  which  preceded  the  dividend  declara- 
tions mentioned,  Union  Pacific  had  advanced  about  seven 
points  in  price,  Southern  Pacific  four  or  five  points.  On 
the  17th  the  high  and  low  prices  of  Union  Pacific  were,  re- 
spectively, 179^4  snd  163;  so  that  the  price  moved  through 
a  range  of  more  than  16  points  in  the  course  of  the  day. 
Southern  Pacific's  range,  from  the  highest  to  the  lowest 
price,  extended  only  from  89  to  82% — little  more  than  six 
points.  In  the  six  days  including  and  preceding  the  17th, 
6,402,213  shares  were  sold;  2,341,185  shares,  36.6  per  cent, 
of  this  total,  were  made  up  of  the  stocks  of  the  two  Harri- 
man  roads — 1,315,550  Union  Pacific  and  1,025,635  South- 
ern Pacific. 

On  the  17th  and  thereafter  during  the  month,  the  entire 
aspect  of  the  stock  market  was  changed  from  that  dis- 
played in  the  early  part  of  August.  A  tremendous  volume 
of  transactions  went  along  with  the  general  meteoric  rise 
of  prices ;  the  latter  characterized  almost  every  stock  in 
the  list  to  a  striking  degree,  not  alone  the  shares  of  the 


68   SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [68 

two  Harriman  roads.  The  closing  price  of  Union  Pacific 
August  I  was  iS3/i',  on  September  ist  it  was  191 54-  The 
closing  prices  on  the  same  two  dates  for  Southern  Pacific 
were,  respectively,  745^  and  90%.  Atchison  advanced- 
during  the  month,  from  92^  to  106^,  and  Pennsylvania 
from  130^^  to  141^.  Among  the  industrial  stocks, 
American  Smelting  and  American  Sugar  secured  the  larg- 
est gains  in  price — that  is,  of  those  stocks  in  which  specu- 
lation was  extensive. 

The  revival  of  speculation  for  the  rise  on  an  enormous 
scale  was  not  followed  by  an  immediate  rise  of  the  interest 
rates  on  call  loans  to  unduly  high  levels.  In  the  week  end- 
ing August  17  the  range  of  rates  quoted  at  the  Stock  Ex- 
change extended  from  2  to  4j4  per  cent.  A  maximum 
rate  of  6  per  cent,  was  reached  the  following  week;  and  on 
the  last  day  of  the  month,  a  12  per  cent,  rate  was  quoted. 
The  slowness  with  which  stringency  developed  in  the  money 
market,  following  the  heavy  volume  of  speculation  for  the 
rise,  might  have  been  explained  by  the  common  report 
that  the  large  operators  who  were  engaged  in  promoting  the 
bull  movement  had  had  their  operations  financed  by  loans 
from  foreign  bankers.  If  this  report  was  true,  and  if  the 
distribution  of  the  bigger  speculators'  holdings  to  small 
outside  speculators  had  not  been  carried  far  up  to  the  end 
of  August,  the  demands  on  the  general  call  money  market 
would  not  have  been  especially  urgent. 

Subsequent  events  showed  rather  conclusively  that  the 
dividend  declarations,  on  the  part  of  the  Harriman  roads' 
directors,  had  not  aroused  investment  buying  at  once  so  that 
it  would  denude  the  speculative  section  of  the  market  of 
Union  Pacific  and  Southern  Pacific  stocks.  The  extent  to 
which  the  shifting  of  stocks  from  speculators  to  investors 
was  in  evidence  or  absent  was  to  afford  the  final  test  of 
Stock  Exchange  speculators'  success  in  ''  anticipating  the 
needs  of  the  market  "  during  1906. 


69]  OVER-SPECULATION  AND  LIQUIDATION  69 

With  the  call  funds  available  in  the  local  money  market, 
brokers  had  increased  difficulty  in  aiding  those  of  their 
customers,  who  were  speculating  for  the  rise,  to  carry 
their  commitments  during  September.  In  the  four  weeks 
of  the  month  the  successive  maximum  call  rates  were  re- 
spectively 40,  12,  10,  and  7,  per  cent.  These  relatively 
high  rates  were  not  effective  in  curbing  speculative  activity 
very  decidedly  or  in  preventing  the  quotations  of  higher 
prices  for  most  speculative  stocks  in  September  than  in 
August.  However  the  stringent  conditions  in  the  money 
market  affected  speculative  sentiment  sufficiently  to  bring 
about  a  general  halt  in  advancing  prices  throughout  the 
month.  Union  Pacific  lost  eight  points  in  its  price  between 
September  ist  and  October  ist;  but  a  dividend  of  5  per 
cent,  was  deducted  during  the  month,  thus  accounting  for 
a  large  portion  of  the  decline. 

The  dependence  on  foreign  loans  as  a  means  of  financing 
the  rising  movement  by  its  promoters  had  made  the  stock 
market  sensitive  to  developments  in  the  local  and  foreign 
banking  situation.  The  aid  of  Secretary  Shaw  was  in- 
voked to  extend  the  facilities  of  the  money  market.  He 
employed  the  device  of  placing  temporarily  Government 
deposits  with  banks  to  which  gold  engaged  for  import  was 
in  transit.  Municipal  bonds  were  accepted  as  security  for 
Government  deposits  also,  provided  that  the  Government 
bonds,  for  which  the  municipal  securities  were  substituted, 
were  used  as  a  basis  for  additional  banknote  circulation. 

This  encouragement  given  by  the  Secretary  of  the  Treas- 
ury to  gold  imports  drew  the  attention  of  the  larger  Euro- 
pean banks.  On  October  loth  the  Reichsbank's  discount  rate 
was  raised  from  5  to  6  per  cent.  The  following  day  the 
Governors  of  the  Bank  of  England  raised  that  institution's 
minimum  rate  from  4  to  5  per  cent. ;  at  a  special  meeting, 
October  19,  the  rate  was  raised  further  to  6  per  cent.     In 


70  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [jq 

November,  the  Bank  of  France  and  many  other  French 
banks  refused  further  to  discount  American  finance  bills. 
Those  French  banks,  which  remained  complaisant  in  af- 
fording this  kind  of  accommodation,  did  so  at  rates  of 
from  4  to  4^  per  cent.,  while  the  regular  discount  rate  in 
the  Paris  money  market  ranged  from  2%  to  3  per  cent. 

The  unmistakable  evidence  of  a  heavy  volume  of  specu- 
lative commitments,  a  relatively  light  volume  of  investment 
absorption — practically  imperceptible  indeed — and  condi- 
tions in  the  money  market  which  rendered  the  long  con- 
tinuance of  speculative  accounts  inconvenient — all  com- 
bined to  bring  about  declines  in  prices  on  the  Stock  Ex- 
change, although  these  declines  individually  were  not  pro- 
found in  October. 

In  November  the  declines  in  many  stocks,  which  had  pro- 
ceeded through  October,  were  checked  to  some  extent. 
The  prices  of  many  stocks  made  positive  net  advances  in 
the  course  of  the  later  month  —  among  them,  St.  Paul, 
Louisville  &  Nashville,  New  York  Central,  Northern 
Pacific,  Reading,  Southern  Pacific,  Union  Pacific,  and 
Colorado  Fuel  &  Iron,  in  which  speculation  had  been  con- 
centrated. Pennsylvania,  in  spite  of  having  its  semi- 
annual dividend  raised  from  3  to  3^^  per  cent,  suffered  a 
slight  fall  of  price  between  November  ist  and  December  ist. 

Liquidation,  w^hich  was  halted  in  November,  was  re- 
sumed in  December  and  the  declines  in  prices  which  ac- 
companied it  were  pronounced  and  general.  Investors 
were  not  impelled  to  absorb  stocks  in  any  large  amounts 
even  at  the  prices  which  had  fallen  below  the  relatively 
high  levels  of  September  or  early  October.  As  the  month 
of  December  and  the  year  drew  to  a  close,  the  declines  in- 
creased in  sharpness  and  magnitude.  The  year  1906 
closed  then  with  prices  falling  as  sharply  as  they  had  risen 
in  the  opening  month  of  the  year. 


7i]  OVER-SPECULATION  AND  LIQUIDATION  yi 

Almost  at  the  end  of  the  year  there  was  unfolded  an 
event,  in  connection  with  railroad  financing,  which  rather 
increased  the  alarm  and  uncertainty  with  which  specula- 
tors regarded  both  the  stock  and  money  markets.  The 
railroad  management  and  financiers  concerned  in  this  de- 
velopment were  much  criticized  for  the  haste  with  which 
they  proposed  to  put  their  plan  into  operation;  but  the 
exigencies  of  the  money  market  and  the  necessity  for  rais- 
ing fresh  sums  of  large  amount  appear  to  have  dictated 
the  details  of  the  plan,  rather  than  the  desire  for  illicit 
gains  through  the  possession  of  advance  information. 

The  railroads,  in  their  efforts  to  effect  the  fresh  financing 
which  the  congested  state  of  their  traffic  handled  with  in- 
adequate facilities  required,  not  only  resorted  to  short-term 
notes;  but  those  roads  whose  stocks  were  quoted  at  levels 
well  above  par  hit  on  the  device  of  inviting  their  stock- 
holders to  subscribe  to  new  issues  of  stock  at  par.  At  the 
close  of  1905  the  Chicago,  Milwaukee  &  St.  Paul  Railway 
had  announced  its  intention  of  pushing  its  lines  to  the 
Pacific  Coast.  By  way  of  raising  funds  for  this  purpose 
a  large  increase  of  the  capital  stock  was  proposed.  In 
December,  1906,  apparently,  the  St.  Paul's  management  did 
not  cherish  any  illusions — whatever  the  speculators  still 
retained — as  to  returning  ease  in  the  money  market  and  a 
widening  of  the  extent  of  the  general  investment  demand. 
The  sudden  announcement.  December  17,  ran  to  the  effect 
that  certificates  of  rights  to  subscribe  to  new  stock  would 
be  issued  to  stockholders  at  once;  December  19th  was 
named  as  the  last  day  on  which  assigned  rights  could  be 
transferred  by  the  stockholders  and  an  initial  payment, 
amounting  to  $10,000,000,  was  called  for  to  be  made 
December  31.  The  amounts  then  outstanding  of  common 
and  preferred  stocks  were,  respectively,  $58,183,900  and 
$49,654,400.     The  amount  of  the  new  issue  was  to  con- 


72   SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [72 

sist  of  $33,164,300  of  new  common  stock  and  of  $66,- 
328,500  preferred.  The  magnitude  of  the  proposed  new- 
issue  and  the  imminent  date  of  the  relatively  large  initial 
payment  required,  proved  rather  staggering  and  violently 
affected  the  prices  of  other  stocks  on  the  list.  St.  Paul, 
for  about  a  week  prior  to  the  announcement  and  for  the 
two  days  immediately  succeeding,  was  the  last  stock  which, 
in  the  long  market  movement,  displayed  a  sharp  upward 
tendency  in  its  price.  The  prosperity  of  the  road,  the  high 
price  of  its  stock  at  that  time,  and  the  announced  amount 
of  the  new  issue,  all  served  to  make  the  rights  extremely 
valuable.  Below  are  given  the  high  and  low  prices  of  St. 
Paul  common,  recorded  on  the  Stock  Exchange  from  De- 
cember 8th  to  the  2ist  inclusive — indicating  the  general 
course  of  that  stock's  price  in  a  two  weeks'  period  of  gen- 
eral liquidation  and  increasing  speculative  timidity : 

High.        Low.  High.        Low. 

Dec.     8  1831/^        18214  Dec.  15  197V?,        i95'/^ 

Dec.    10 183%         181^  Dec.  17  199H        IQ^^ 

(New  issue  announced.) 

Dec.    II   189K        184  Dec.  18  194  183 

Dec.    12   1895^         187^  Dec.  19  154  MZ 

(Sold  ex-rights.) 

Dec.    13  192^         188  Dec.  20  152^         150 

Dec.    14  198^^         192  Dec.  21   152^         151 

Following  the  announcement  of  the  St.  Paul's  issue  of 
new  stock,  there  was  no  such  sharp  rise  in  prices  generally 
as  had  followed  the  Harriman  roads'  dividend  declarations 
in  the  preceding  August.  The  stringency  of  the  money 
market,  which  had  been  apparent  for  some  months,  and  the 
dawning  understanding,  on  the  part  of  the  speculators,  of 
the  lack  of  investment  demand,  prevented  any  renewal  of  a 
bull  movement.  The  briefly  enduring  rise  in  St.  Paul,  im- 
mediately before  and  after  the  announcement  of  its  finan- 
cial  plans,   was  the  last   gasp  of  the   general   speculative 


73]  OVER-SPECULATION  AND  LIQUIDATION  73 

movement  which  had  its  birth  in  September,  1904.  In  the 
last  week  of  1906  began  the  general  almost  uninterrupted 
decline  which  continued  into  1907  and  formed  the  leading 
feature  of  the  stock  market  in  that  year.  The  chief  re- 
sult of  St.  Paul's  closing  rally  was  to  add  to  the  disquieting 
sum  of  imminent  events  which  were  to  impose  fresh  strains 
on  the  financial  markets. 

W^hen  the  second  half  of  1906  opened,  it  was  clearly 
evident  that,  in  the  first  place,  no  power  of  investment 
absorption  had  been  manifested  which  had  shown  itself 
able  to  withdraw  from  speculators  on  the  Stock  Exchange 
the  large  quantities  of  stocks  they  had  carried.  It  was 
idle  to  assume  that  an  investing  class,  well  supplied  with 
funds,  stood  ready  to  relieve  the  speculators  of  their  bur- 
dens. And  whatever  might  have  been  the  total  extent  of 
investors'  resources,  the  San  Francisco  fire  and  the  life 
insurance  legislation  had  made  it  plain  that  two  groups  of 
corporations,  which  together  made  up  an  important  section 
of  the  investing  class,  would  be  eliminated  as  factors  in  the 
outright  purchase  of  stocks.  The  restrictions  imposed  on 
the  investing  capacity  of  both  classes  of  insurance  com- 
panies constituted  the  only  definite  body  of  facts  on  which 
estimates  of  investing  powers  could  be  based.  And  cer- 
tainly the  increased  inducements  which  were  held  out  to 
investors  to  subscribe  to  new  issues  of  bonds  and  notes 
did  not  point  to  any  belief,  on  the  part  of  experienced  bank- 
ers and  financiers,  in  the  existence  of  an  unrestricted  omni- 
vorous class  of  investors.  Nor  did  the  respective  restilts 
of  the  two  issues  of  New  York  City  bonds,  whether  com- 
pared with  each  other  or  with  the  results  of  preceding  sales 
of  the  same  character,  indicate  an  extensive  demand  for 
investment  securities. 

In  view  of  the  positive  restrictions  on  general  invest- 
ment buying  power  and  the  failure  of  investors  in  large 


74  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [74 

numbers  to  appear  in  the  first  half  of  the  year,  either  when 
prices  were  high  or  when  they  were  low,  it  is  difficult  to 
see  how  the  heavy  speculation  for  the  rise  in  August  and 
September  could  have  met  with  ultimate  success.  Of 
course  individual  speculators  could  sell,  on  a  rising  market, 
to  other  speculators  at  a  profit.  But  this  process  would 
be  brought  to  a  halt  when  no  more  speculative  purchasers 
appeared.  This  check  to  a  general  speculative  movement 
for  rising  prices  had  occurred  repeatedly  throughout  1906, 
attended  apparently  with  no  consequences  of  a  serious  na- 
ture in  the  first  half  of  the  year.  In  that  period,  when 
speculation  for  the  rise  and  an  advance  of  prices  had  been 
followed  by  a  general  decline  and  a  certain  amount  of  li- 
quidation, the  latter  were  halted  in  turn  by  renewed  specu- 
lative purchases,  which  did  not  intervene  to  arrest  the  de- 
cline with  which  the  year  came  to  an  end. 

The  general  decline,  which  immediately  followed  the 
sharp  rise  of  August  and  September,  was  interrupted  by 
no  prolonged  rise  during  October,  November  and  Decem- 
ber. In  November,  as  we  have  noticed,  the  progress  of 
liquidation  was  stayed  for  a  short  period.  But  neither 
general  investment  buying  nor  heavy  speculative  purchases 
intervened  to  bring  about  any  relatively  prolonged  rising 
movements  such  as  were  in  evidence  during  the  preceding 
March  and  May,  for  instance.  The  stock  market,  in  the 
last  three  months  of  the  year,  was  characterized  by  li- 
quidation which  varied  in  its  rate  of  progress  but  scarcely 
in  its  nature.  The  only  uncertainty  at  the  close  of  the 
year  related  to  the  low  points  to  which  prices  would  fall  in 
1907  before  the  elimination  of  weaker  speculators  and  in- 
vestment buying  would  act  to  bring  an  end  to  the  general 
decline. 

Liquidation  continued  with  renewed  force  in  January, 
1907.     So  clearly  was  it  under  way,  with  no  likelihood  of 


75]  OVER-SPECULATION  AND  LIQUIDATION  75 

its  being  halted  before  running  its  full  course,  that  two 
great  European  banks  apparently  thought  it  safe  to  reduce 
their  respective  discount  rates.  The  Bank  of  England's 
rate  was  lowered  from  6  to  5  per  cent.,  January  17,  and 
the  Reichsbank's  from  7  to  6  per  cent,  on  the  22nd.  When 
the  rising  movement  had  been  stayed  the  preceding  October, 
it  will  be  recalled,  each  bank,  by  raising  its  rate,  had  most 
effectively  prevented  gold  imports  by  New  York  interests 
from  England  and  Germany,  with  which  further  specula- 
tion for  the  rise  might  have  been  assisted.  Throughout 
November  and  December  the  high  rates  were  maintained 
at  London  and  Berlin.  The  unmistakable  liquidation,  how- 
ever, which  set  in  during  January,  removed  the  danger  of 
any  drain  of  gold  to  the  United  States,  at  least  for  the 
time  being,  and  it  was  therefore  thought  safe  to  lower  the 
foreign  discount  rates. 

Following  the  course  which,  in  the  preceding  month,  the 
Great  Northern,  Northern  Pacific,  and  St.  Paul  Railways 
had  adopted  as  a  means  of  obtaining  fresh  capital,  the 
Chicago  &  Northwestern  announced  an  issue  of  new  com- 
mon stock,  amounting  to  $24,403,000,  for  w^hich  stock- 
holders could  subscribe  at  par  by  paying  for  it  in  full  on 
the  following  March  i6th.  This  was  the  last  of  the  large 
stock  issues,  which  played  so  prominent  a  part  in  the  last 
few  months  of  the  declining  market ;  and  which  Mr.  E. 
Meyer,  Jr.,  has  characterized  as  "  the  practical  assessment 
of  stockholders."  ^ 

Another  device  was  employed  to  raise  capital  in  the 
shape  of  three-year  5  per  cent,  note  issues  which  were 
put  out  by  the  Southern  Railway,  the  New  York  Central — 
together  with  some  of  its  subsidiary  companies — and  the 
American   Telephone   &   Telegraph   Company,    in   the   re- 

2  Yale  Review,  "  The  New  York  Stock  Exchange  and  the  Panic  of 
1907,"  May,  1909,  p.  44. 


^76   SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [76 

spective  amounts  of  $15,000,000,  $50,000,000  and  $25,- 
000,000.  The  New  York,  New  Haven  and  Hartford  also 
announced  issues  of  obligations  of  differing  kinds,  to  the 
amount  of  $26,000,000. 

As  we  glance  at  the  table  of  closing  prices,  on  Januarys 
2nd  and  February  ist,  of  those  stocks  in  which  speculators 
had  been  most  interested,  we  see  that  for  Southern  Pacific 
and  Steel  preferred  alone  were  gains  recorded  between 
the  two  dates  named — and  in  both  cases,  those  gains  were 
only  fractional.  The  losses  sustained  by  the  prices  of  other 
stocks  ranged ,  from  one  or  two  points  to  slightly  more 
than  thirty  points — this  latter  amount  w'as  the  decline  in 
price  suffered  by  Northern  Pacific.  The  number  of  shares 
sold  on  the  Stock  Exchange,  22,702,760,  exceeded  that 
recorded  for  any  of  the  three  preceding  months  in  which 
liquidation  had  been  in  operation. 

This  first  month's  burst  of  unmistakable  liquidation  was 
continued  in  February ;  in  the  latter  month  the  sales  on  the 
Exchange  amounted  to  16,470,972  shares — a  volume  of 
transactions  which  indicated  some  slackening  in  the  urgency 
of  forced  selling,  when  it  is  compared  with  the  records 
for  January.  The  declines  in  the  prices  of  the  more 
speculative  stocks  were  not  so  sharp  as  they  had  been  in 
January.  The  prices  of  Atchison,  American  Locomotive, 
and  American  Sugar  rose  slightly  between  February  ist 
and  March  ist 

The  Pennsylvania  Railroad  announced  in  February  that 
its  issues  of  new  securities  would  be  concluded  after  it 
had  sold  $50,000,000  three-year  5  per  cent,  notes.  For 
the  railroads  generally  this  issue  was  the  last  which  had 
been  put  forth  with  some  reluctance  under  the  pressing 
necessity  wdiich  weighed  upon  so  many  of  the  roads. 

Of  the  $30,000,000  New  York  City  4s  offered  in  Febru- 
ary, $26,000,000  falling  due  in  1956  were  taken  by  bidders 
in  their  entirety;  but  of  the  remaining  $4,000,000,  having 


yy-]  OVER-SPECULATION  AND  LIQUIDATION  yy 

shorter  maturities — $1,500,000  falling  due  in  1926  and 
$2,500,000  in  19 1 6 — only  a  part  was  taken.  For  muni- 
cipal bonds,  as  for  railroad  securities,  the  investment  mar- 
ket was  still  restricted. 

In  March  liquidation  became  more  urgent  and  was 
accompanied  by  sales  on  the  Stock  Exchange  of  32,208,- 
525  shares.  The  volume  of  transactions  thus  repre- 
sented exceeded  even  the  extraordinary  total  of  the 
preceding  August,  and  was  the  heaviest  recorded  since 
January,  1906.  April  and  May,  1901,  were  the  only  other 
months  which  have  surpassed  March,  1907,  in  this  re- 
spect. On  the  13th  there  were  severe  general  declines; 
and  on  the  14th — the  date  of  the  so-called  "  Silent  Panic  " 
— transactions  amounted  to  2,571,516  shares,  against  2,- 
183,867  on  the  13th.  These  two  days  were  also  those  on 
which  British  Consols  in  London  attained  successive  low 
records  in  the  quoted  prices  of  many  years.  The  quota- 
tion of  84^Vi6  on  the  13th  was  the  lowest  price  since 
1866,  and  that  of  84V16  on  the  following  day  marked  the 
lowest  price  since  1848.  Although  the  low  points  reached 
March  14  on  the  Stock  Exchange  attracted  the  widest  at- 
tention, that  day's  low  prices  were  by  no  means  the  lowest 
reached  in  the  general  liquidation  of  the  month.  On  the 
25th,  prices  reached  still  lower  levels  than  those  at  which 
they  were  quoted  on  the  14th. 

With  the  month  of  March,  1907,  the  period  of  Stock  Ex- 
change activity  selected  for  study  was  concluded.  This 
month  was  chosen  as  the  concluding  one,  because  the  pro- 
found declines  and  panics,  which  characterized  it,  appear 
to  have  marked  the  end  of  the  period  of  public  participa- 
tion on  a  large  scale  in  the  stock  market,  which  had  be- 
gun in  the  autumn  of  1904.  Throughout  the  remaining 
nine  months  of  1907,  the  volume  of  sales  on  the  Stock 
Exchange — measuring  roughly  the  degree  of  speculative 
activity — presented  a  monthly  average,  amounting  to   13,- 


^8   SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [78 

895,185  shares,  which  is  much  below  that  of  the  31  months' 
period — running  from  September,  1904,  to  March,  1907 — 
amounting  to  23.554,291  shares,  and  even  less  than  the 
monthly  average  of  16,149,954  shares  for  the  thirteen 
years,  1900  to  19 12,  inclusive.  It  appears,  therefore,  as 
if  public  speculation  on  the  Stock  Exchange  on  a  rela- 
tively large  scale  ended  for  the  time  with  the  close  of 
March,  1907. 

Of  course  the  general  decline  in  the  stock  market  was 
not  ended  for  1907  by  the  end  of  March.  But  the  de- 
clines W'hich  occurred  later  in  the  year,  particularly  those 
of  October,  were  accompanied  by  disturbances  having  no 
immediate  internal  connection  with  the  Stock  Exchange. 
The  protracted  fall  of  prices  and  the  liquidation  which  ran 
through  the  last  three  months  of  1906  and  the  first  three 
months  of  1907,  on  the  other  hand,  took  place  in  a  period 
of  generally  expanding  prosperity  and  economic  activity; 
so  that  the  liquidation  and  depression  of  those  six  months 
appeared  to  have  arisen  from  internal  conditions  in  the 
stock  market,  rather  than  from  conditions  outside  it. 

We  may  not  fully  agree  with  Mr.  Meyer,  when  he  writes 
in  the  article  already  cited  that  over-speculation  for  the  rise 
on  the  Stock  Exchange  had  been  completely  liquidated 
early  in  1907,  and  that  the  declines  of  later  months  repre- 
sented Stock  Exchange  liquidation  "  for  the  industries  and 
businesses  of  all  the  country,  months  after  [the  Stock  Ex- 
change] had  liquidated  for  itself."  But  much  of  the  li- 
quidation subsequent  to  March  appeared  to  arise  from 
other  conditions  than  over-extended  speculation  for  the 
rise  on  the  Stock  Exchange.  The  difficulty  of  analyzing 
the  conditions  under  which  liquidation  in  the  latter  part 
of  1907  was  conducted,  together  with  the  considerations 
we  have  briefly  set  forth,  have  led  us  to  conclude  the  period 
of  Stock  Exchange  activity  selected  for  study  with  March, 
1907. 


CHAPTER  VI 

The  Assumed  Investment  Demand 

In  the  preceding  narrative  of  events,  connected  with 
Stock  Exchange  speculation  in  1906,  repeated  reference 
has  been  made  to  the  ingrained  assumption  of  financial 
writers  and  speculators  that  a  large  class  of  investors 
existed,  possessing  in  the  aggregate  a  huge  fund  with  which 
that  class  stood  ready  to  purchase  any  issue  of  securities 
that  might  demonstrate  its  desirability  for  investment  pur- 
poses, whatever  market  price  the  stock  of  that  issue  might 
have  attained  when  its  desirability  became  clearly  evident. 
Many  financial  writers,  who  undertook  to  interpret  the 
events  of  1906  and  1907,  founded  their  arguments  on  this 
assumption.  After  the  first  severe  decline  of  1906,  in 
February,  it  was  declared  that  ^  investors  had  not  been 
inclined  to  buy  stocks  generally  after  the  rise  of  January 
because  the  extensive  and  substantial  increases  in  dividends, 
for  which  speculators  had  looked  and  on  which  they  based 
the  conduct  of  their  operations,  had  not  been  forthcoming. 
A  former  railroad  president  asserted  later  in  the  year  that 
investors  had  been  repelled  by  the  way  in  which  various 
managers  of  corporations,  both  railroad  and  industrial, 
had  juggled  the  finances  of  the  companies  under  their 
direction.^  We  might  quote,  at  this  point,  the  story  of  the 
large  stock  issues  which  many  of  the  great  railroads  put 
forth  in  the  closing  days  of  1906  and  early  in  1907,  as  it 

^  Commercial  and  Financial  Chronicle,  Feb.  24,  1906,  p.  416. 
2  Ibid.,  Jan.  5,  1907,  p.  2. 

79]  79 


oo  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [go 

was  told,  both  by  Mr.  E.  Meyer,  Jr.,  and  by  Senator 
LaFollette — two  men  who  beheld  the  events  in  question 
from  viewpoints  that  differed  from  each  other  as  widely 
as  was  possible.  Speaking  from  a  Wall  Street  man's 
standpoint,  Mr.  Meyer  gave  the  following  brief  account  of 
the  issues  of  new  stock  and  the  circumstances  which  led 
up  to  them: 

[In  the  latter  part  of  1906]  the  railways  of  the  country, 
staggering  under  a  load  of  traffic  which  exceeded  the  capacity 
of  their  equipment,  cried  aloud  to  the  investing  public  for 
funds.  But  railway  investments  had  been  made  unattractive 
by  radical  anti-railroad  legislation,  by  the  imposition  of  new 
and  onerous  burdens  upon  railway  operations,  by  the  increased 
cost  of  operation,  owing  to  a  general  advance  in  the  prices  of 
wages  and  materials,  compared  with  a  decrease  in  freight  and 
passenger  rates  which  was  legislated  upon  the  railroads — the 
whole  thing  creating  a  situation  which  resulted  in  the  under- 
mining of  confidence  in  railway  values  generally. 

...  In  spite  of  all  the  handicaps,  the  railroads  endeavored 
to  increase  their  facilities  to  handle  properly  the  abnormal 
business,  and  their  only  recourse  in  many  instances  to  make 
these  needed  extensions  was  the  practical  assessment  of  stock- 
holders through  the  issue  of  new  stock.  Is  it,  therefore,  any 
wonder  that  "  far-sighted  investors  "  withdrew  from  the  situa- 
tion, causing  the  first  stage  of  liquidation  which  culminated 
in  March,  1907?  .  .  .  ^ 

The  following  account  of  these  events  was  given  by 
Senator  LaFollette: 

.  .  .  The  master  organizations  put  forth  all  their  efTorts  to 
stay  the  downward  trend  in  Wall  Street  and  to  stimulate  a 
lagging  market. 

3  Yale  Review,  "  The  New  York  Stock  Exchange  and  the  Panic  of 
1907,"  May,  1909,  p.  44. 


8l]  THE  ASSUMED  INVESTMENT  DEMAND  gl 

This  is  history,  Mr.  President.  They  forced  dividend  pay- 
ments. They  made  them  extravagant.  The  Baltimore  &  Ohio, 
the  Pennsylvania,  the  Santa  Fe,  the  New  York  Central,  the 
Union  Pacific,  the  other  companies,  declared  dividends  lav- 
ishly. It  was  not  so  difficult.  The  traffic  of  the  country  paid 
for  it  all.  The  stock  market  responded  and  stocks  took  new 
high  records.  Determined  to  outface  appearances,  the  groups 
ordered  a  new  issue  of  stocks.  In  the  last  half  of  1906  not 
less  than  $5oo,ooo,cxdo  of  railway  stocks  alone  were  thrown 
upon  the  market,  dividend  issues  keeping  step  with  stock 
issues.  It  was  designed  to  betoken  a  carnival  of  prosperity. 
It  was  expected  that  the  country  investors  would  respond  in 
the  old  way  and  their  money  be  drawn  into  this  financial  center 
to  prop  it  up.  But  the  public  did  not  come  in.  Railroad 
securities  had  fallen  into  disrepute.  Watered  when  the  roads 
were  built,  watered  when  they  were  merged  into  systems, 
watered  again  when  the  systems  were  grouped,  railroad  stocks 
and  bonds  were  regarded  by  the  public  with  a  suspicion  bor- 
dering on  contempt.  ^Morgan  and  Rockefeller  and  Harriman 
and  Hill  were  almost  daily  making  some  new  move  in  the 
great  game,  but  the  public  had  one  answer :  *'  It  is  water ; 
more  water."  * 

We  need  not  stop  to  reconcile  the  discrepancies  in  these 
two  narratives  of  the  same  events,  or  to  question  the  ac- 
curacy of  statements  made  by  either  author.  Both  agree, 
at  any  rate,  on  the  fact  that  large  issues  of  new  stock  were 
put  out  by  various  railroads ;  and  also  they  take  for  granted 
the  existence  of  an  expectant  class  of  investors  who  \vould 
have  been  able  to  buy  the  stocks  if  they  had  felt  inclined 
to  do  so ;  their  not  doing  so.  according  to  each  author, 
arose  from  the  fact  that  the  new  issues  presented  no  at- 
tractions to  them,  because  of  distrust  awakened  by  causes 
which  differed  according  to  the  account  read.     This  dis- 

*  LaFollette's  Weekly,  "  The  Truth  about  the  Panic  of  1907,"  March 
15,  1913.  p.  5. 


82   SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [82 


trust — whether  it  sprang  from  the  dreaded  consequences 
of  governmental  regulation  of  railroads  or  from  the  public's 
conviction  that  these  new  issues  of  stock  were  "  water ; 
more  water  " — had  been  the  unique  cause  for  the  inves- 
tors' refusal  to  buy  the  stocks  in  question  and  to  withdraw 
them  from  the  market.  Both  the  Stock  Exchange  apolog- 
ist and  the  radical  Western  Senator  are  at  one  in  assuming 
the  presence  of  an  investing  class  with  available  money 
resources  of  indefinite  extent. 

The  two  interpretations,  given  above,  of  events  leading 
up  to  the  panics  of  1907 — like  all  the  differing  forms  of 
these  two  types  of  interpretations — point  with  emphasis  to 
the  distrust  of  investors.  But  w^e  may  seriously  question 
the  validity  of  the  assumption  which  the  authors  of  both 
afccounts  almost  explicitly  state.  V\'as  there  any  evidence 
that  throughout  1906  a  large  investing  class  continually 
stood  ready  to  purchase  any  securities  which  came  up  to 
certain  requirements — with  respect  to  security  or  the  pros- 
pect of  steady  income  yield — formulated  by  speculators? 
We  certainly  have  no  direct  evidence  that  any  such  class 
existed  during  that  year  and  1907,  at  any  rate.  Most  of 
our  indirect  evidence — on  which  our  chief  reliance  must 
be  placed — of  the  attitude  of  prospective  investors  and  of 
the  strength  of  the  demand  they  could  present,  was  fur- 
nished by  the  size  of  various  bond  issues,  the  rates  of 
interest  they  bore,  and  the  terms  on  which  they  were  of- 
fered to  investors;  and  also  by  the  ultimate  results  of  the 
offerings  where  these  were  ascertainable.  This  indirect 
evidence  pointed  to  a  steady  contraction  of  the  general 
investment  fund  which  was  applicable  to  the  purchase  of 
securities  in  the  New  York  financial  markets. 

At  the  beginning  of  the  period  we  undertook  to  consider 
— running  from  September,  1904,  to  March,  1907 — inves- 
tors appeared  willing  to  take  up  any  issue  of  bonds  with  the 


83]  THE  ASSUMED  INVESTMENT  DEMAND  83 

utmost  readiness.  So  striking  was  the  omnivorous  char- 
acter of  investment  absorption  in  the  latter  part  of  1904 
and  early  in  1905  that  it  drew  the  attention  of  the  financial 
press.  In  the  Economist,  December  31,  1904,  there  ap- 
peared a  comment  on  this  tendency,  as  displayed  in  the 
New  York  financial  markets;  and  as  a  further  indication 
of  the  strong  investment  demand,  for  bonds  at  least,  we 
quote  the  following : 

The  extremely  active  demand  for  bonds  of  the  better  class 
still  constitutes  one  of  the  noteworthy  features  of  the  situa- 
tion. After  the  set-back  experienced  in  1903,  a  marked  re- 
vival occurred,  it  will  be  remembered,  during  1904.  Indeed, 
the  avidity  with  which  new  bond  issues  were  taken  up  in  this 
last-mentioned  year  was  one  of  the  most  striking  characteristics 
of  that  period.  Month  after  month  one  new  loan  after  an- 
other was  brought  out,  and  not  the  least  difficulty  was  experi- 
enced in  finding  purchasers  for  these  enormous  additions  to 
the  investment  list  of  securities ;  about  the  only  point  insisted 
on,  apparently,  was  that  the  new  obligations  should  be  of  un- 
doubted character.  The  short-term  notes  issued  by  the  rail- 
roads during  the  last  two  years  have  almost  disappeared  from 
the  market.  This  demand  for  the  better  grarle  of  securities 
has  continued  up  to  the  present  time,  and  wlienever  a  new 
loan  is  brouglU  out  the  whole  offering  is  quickly  absorbed.^ 

The  investment  demand  did  not  apparently,  however, 
retain  the  omnivorous  character,  so  noticeable  in  the  last  of 
1904,  through  the  following  calendar  year.  It  was  thought 
best  in  1905  by  the  bankers  who  had  charge  of  two  Ameri- 
can allotments  of  Japanese  government  loans,  to  offer  the 
securities  representing  those  loans,  which  bore  interest  at 
the  rate  of  4}^  per  cent.,  to  subscribers  at  87^.  The  large 
extent  to  which  both  allotments  were  oversubscribed  may 

■''  Commercial  and  Financial  Chronicle,  Jan.  21,  1905,  p.  185. 


84  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [84 

indicate  the  possibility  that  more  favorable  terms  for  the 
borrowers  could  have  been  obtained.  But  the  issue  by 
several  railroads  of  bonds,  on  terms  almost  exactly  the 
same  as  those  of  the  Japanese  loans,  pointed  to  a  certain 
change  in.  the  character  of  the  investment  demand.  To 
be  sure,  neither  of  the  railroads,  issuing  the  securities  we 
have  mentioned,  enjoyed  such  prosperity  as  to  establish 
its  credit  on  the  highest  possible  plane  beyond  peradventure. 
But  the  rates  of  interest  on  the  new  securities  and  the  low 
prices  at  which  they  were  offered  stand  out  strikingly  as 
over  against  the  4  per  cent,  bonds  which  had  been  so  com- 
mon up  to  a  short  time  previous.  There  was  a  tendency 
to  shorten  the  lives  of  bonds  and  to  raise  the  rates  of 
interest  which  they  bore. 

Not  only  the  bonds  of  railroads  and  other  corporations 
were  put  forth  at  interest  rates  which  gradually  rose,  but 
the  same  tendency  was  observable  in  New  York  City  bonds. 
Shortly  before  1906,  New  York  City  had  been  able  to  put 
out  abundant  issues  of  y/2  per  cent,  bonds.  Early  in 
1906,  an  issue  of  4  per  cent,  bonds  was  sold  by  the  city  at 
a  price  which  netted  3.65  per  cent,  interest,  allowing  for 
the  length  of  that  issue's  maturity.  Another  issue  in  July 
of  that  year,  amounting  to  only  $12,500,000,  could  not 
be  sold  in  its  entirety,  and  those  of  which  the  Comptroller 
was  able  to  dispose  were  sold  on  an  average  interest  basis 
of  3.94  per  cent.  The  results  of  this  sale  were  subjected 
to  wide  comment.  Thus,  by  the  middle  of  1906,  the 
Comptroller  of  New  York  City,  in  putting  out  new  issues, 
was  beset  with  difficulties,  much  the  same,  in  kind  though 
not  in  degree,  as  those  encountered  by  railroad  managers 
who  at  this  time  desired  to  make  new  issues  of  securities. 
In  June  the  reported  failure  to  underwrite  successfully  the 
marketing  of  $24,000,000  Chicago,  Burlington  k  Quincy 
Railroad,  Illinois  Division  4s  had  shown  the  limitations 
placed  on  the  investing  market  in  some  directions. 


85]  THE  ASSUMED  INVESTMENT  DEMAND  85 

Although  the  difficulty  of  selling  the  best  classes  of  rail- 
road bonds  to  investors  directly  may  have  indicated  the 
distrust  aroused  by  proposed  governmental  regulation,  the 
decreasingly  favorable  terms  of  successive  New  York  City 
bond  sales,  throughout  the  period,  can  hardly  be  ascribed 
to  that  distrust.  The  physical  restrictions  which  had  been 
imposed  on  investment  powers  of  absorption  along  certain 
lines  by  the  San  Francisco  fire  and  the  life  insurance  legis- 
lation, had  been  mentioned  in  the  spring  of  1906  as  factors 
which  might  lead  to  disturbance.  Attention,  after  being 
drawn  most  powerfully  to  these  quantitative  restrictions 
on  the  investment  market,  was  apparently  diverted  to  other 
phenomena.  It  was  felt  that,  because  an  apparently  limit- 
less and  omnivorous  investment  absorption  had  manifested 
itself  in  1904,  it  must  always  exist,  potentially  at  any  rate, 
so  long  as  the  country's  prosperity  endured. 

As  a  matter  of  fact,  nothing  whatever  was  known  by 
speculators  of  the  nature  and  extent  of  the  investment  de- 
mand throughout  the  entire  period  we  have  considered — 
that  is,  the  possibility  that  this  demand  would  extend  to 
stocks  listed  on  the  Exchange.  The  individual  speculator 
for  the  rise — whether  he  sold  to  obtain  a  profit  or  to  limit 
the  extent  of  his  losses — cared  little,  nor  has  be  ever  cared, 
whether  the  buyer  was  another  speculator  or  an  investor. 
His  eyes  were  fixed  on  the  course  of  prices.  Those  prices 
might  express  concretely  an  extensive  and  effective  in- 
vestment demand ;  or  they  might  merely  reflect  the  col- 
lective effort  of  speculators  to  "  anticipate  "  an  assumed 
investment  demand.  The  future  course  of  prices,  at  any 
time,  would  be  determined,  in  the  speculator's  mind,  by  the 
increasing  or  diminishing  worth  of  a  given  stock  to  in- 
vestors ;  that  worth  in  its  turn  would  depend  on  the  general 
prosperity  of  the  country,  the  company's  earnings,  and 
the  amount  of   those  earnings  paid   out  in   the   form   of 


86  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [86 

dividends.  Doubtless,  some  data  with  regard  to  the  rate 
of  investment  buying  could  have  been  obtained — or  with 
regard  to  the  extent  of  investment  selling — in  connection 
with  the  several  stocks  which  were  either  attracting  or 
repelling  investors;  but  no  such  information  was  ever  forth- 
coming. It  was  much  more  convenient,  even  if  it  was  a 
course  subject  to  a  high  degree  of  risk,  to  assume  the 
existence  of  a  huge  investment  fund  which  w^ould  be  ap- 
plied to  the  outright  purchase  of  stocks  which  fulfilled  cer- 
tain formal  requirements,  at  prices  considerably  in  advance 
of  those  at  which  most  of  the  speculative  commitments  had 
been  entered  upon. 

But  there  was  a  factor  in  operation  which  would  have 
tended  to  weaken  the  powers  of  investment  buying  in 
1906,  aside  from  the  cramping  of  the  fire  insurance  com- 
panies by  the  San  Francisco  fire  and  life  insurance  com- 
panies by  state  legislation,  with  regard  to  the  part  they 
could  play  as  purchasers  of  stocks  in  the  open  market;  and 
quite  aside  from  the  huge  capital  issues  of  the  preceding 
two  years,  or  from  the  losses  incurred  in  the  Russo- 
Japanese  war.  It  is  a  platitude  of  English  financial  mar- 
kets that  the  prices  of  investment  stocks  and  the  general 
activity  of  trade  tend  to  take  divergent  courses.  This 
arises  from  the  inducement  offered  many  investing  busi- 
ness men  to  sell  their  securities,  when  trade  is  active,  and 
to  employ  the  money  they  obtain  from  the  sales  in  more 
profitable  ways.  Of  course  this  tendency  is  obscured  by 
the  likelihood  that  investment  securities  will  have  a  tend- 
ency to  rise  as  the  companies  they  represent  share  in  the 
prosperity  usually  going  along  with  active  trade.  When 
trade  rather  tends  to  become  less  active,  investment  pur- 
chases are  made  on  an  increased  scale. 

This  varying  tendency  of  investment  buying,  a  British 
financial  truism,  is  hardly  recognized  in  this  country.      Pos- 


Sy]  THE  ASSUMED  INVESTMENT  DEMAND  g/ 

sibly  this  is  due  to  the  fact  that  many  holders  of  Ameri- 
can investment  securities  are  foreigners  whose  only  inter- 
est in  American  business  activity  has  been  to  draw  divid- 
ends and  interest  from  the  securities  which  are  favorably 
affected  by  that  activity.  Thus  the  tendency,  which  in 
England  acts  so  as  to  obscure  the  inverse  relation  between 
trade  and  security  prices,  had  been  prior  to  1906  more 
prominent  in  this  country  than  the  main  tendency  expressed 
in  the  ''  axiom  "  of  the  financial  market,  as  the  Economist 
denominates  it^ 

So  long  as  expanding  prosperity  and  heightened  com- 
mercial activity  proceeded  at  a  much  more  rapid  rate  in 
this  country  than  in  Europe,  foreign  investors  would  not 
have  presented  to  them  the  strong  inducements  to  sell  that 
concurrent  activity  in  their  own  countries  would  offer. 
But,  when  the  maximum  capacities  of  industry  and  com- 
merce were  undergoing  a  world-wide  strain,  as  in  1906, 
the  urgency  of  an  effective  investors'  demand  would  be 
much  w^eakened.  And  in  view  of  the  widespread  and  in- 
tense business  activity  of  that  year,  the  tacit  assumption, 
on  the  part  of  speculators  generally  and  of  many  financial 
writers,  that  a  practically  unlimited  investors'  demand 
existed  for  stocks  paying  steady  dividends,  with  little  re- 
gard for  prices,  appears  to  have  been  additionally  unwar- 
ranted. The  narrowing  of  the  general  investment  market 
was  quite  clearly  indicated  throughout  1905  and  1906  in 
the  diminishing  volume  of  bond  issues  and  in  the  increas- 
ing rates  of  interest  they  bore.  It  is  difficult  to  see  how, 
in  the  face  of  the  perceptibly  decreasing  capacity  for 
absorbing  new  bond  issues  and  the  increase  in  economic 
activity  of  every  sort,  the  assumption  mentioned  could  have 
been  regarded  seriously.  The  events,  which  v/ould  tend 
to  weaken  faith  in  it,  were  apparent  to  all  by  the  middle  of 

"  Economist,  Feb.  22,  1913,  p.  408. 


88   SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [88 

1906  and  were  discussed  very  widely;  but  speculators,  for 
the  remainder  of  the  year,  and  others  who  have  since  dis- 
cussed their  activities,  still  adhered  to  the  belief  that  the 
investing  class  possessed  sufficient  means  to  take  off  specu- 
lators' hands  the  large  amounts  of  stocks  in  the  market, 
had  they  so  desired,  and  that  the  condition  which  pre- 
vented investors'  buying  on  a  large  scale  had  been  their 
unwillingness  to  do  so.  Upon  the  causes  of  this  assumed 
unwillingness  much  of  the  discussion  has  since  hinged. 

It  must  not  be  supposed  that  all  of  the  sales  made  on  the 
Stock  Exchange  during  1906  represented  merely  the  inter- 
change of  stocks  among  speculators,  and  that  investment 
buying  was  quite  lacking.  The  latter  doubtless  operated 
in  some  degree  pretty  steadily  throughout  the  whole  year 
and  during  1907.  But  investors  revealed  not  the  slight- 
est tendency  to  increase  their  purchases  of  those  stocks 
which  were  advanced  in  price  as  a  result  of  speculative 
buying  or  possibly  of  manipulation.  As  to  the  extent  and 
nature  of  outright  purchases  on  the  Stock  Exchange  for  the 
account  of  investors  at  any  given  time  nothing  was  known 
or  has  ever  been  known  by  the  general  body  of  speculators 

If  little  information  was  to  be  obtained  concerning  in- 
vestment purchases,  nothing  more  was  known  of  investors' 
selling.  If,  for  example,  the  rise  of  the  Union  Pacific's 
dividend  from  6  to  10  per  cent,  in  August,  1906,  might 
have  acted  as  a  lure  to  investors,  causing  them  to  purchase 
in  large  amounts,  the  rise  of  22  points  in  price,  which 
followed  in  the  course  of  a  few  days  after  the  increase  of 
the  dividend,  offered  equally  strong  inducements  to  those 
investors  who  might  have  bought  at  prices  below  the  low 
point  of  August  17th,  to  sell  at  a  profit. 

The  sum  of  general  expectations  in  1906  consisted  in 
assuming  the  existence  of  investors  possessing  in  the  ag- 
gregate a  huge  volume  of  resources:  to  those  imaginary 


8g]  THE  ASSUMED  INVESTMENT  DEMAND  g^ 

investors — they  may  fairly  be  so  considered  since  they  never 
once  furnished  evidence  of  their  existence — was  attributed 
the  formulation  of  certain  requirements  which  the  stocks 
they  bought  must  possess,  such  as  financial  stability  and 
a  satisfactory  rate  of  return  to  their  respective  possessors. 
Underlying  any  thought  which  speculators  for  the  rise  be- 
stowed on  their  operations  in  1906,  was  the  assumed  exist- 
ence of  the  investing  class.  Not  only  did  speculators  ab- 
stain from  seeking  direct  evidence  that  this  class  existed 
to  the  extent  that  the  speculators,  and  some  superficial 
writers  on  these  matters,  imagined;  but  they  were  given 
abundant  evidence  that  the  powers  of  the  actually  existing 
investment  class  had  been  greatly  weakened.  All  this  in- 
formation— somewhat  indirect  in  its  bearing  on  Stock  Ex- 
change investments  perhaps,  but  still  quite  worthy  of  at- 
tention— although  accessible  to  the  speculators,  was  disre- 
garded ;  an  extensive  general  rise  of  prices  occurred  in  Au- 
gust and  September,  and  a  large  body  of  speculators  entered 
the  market,  utterly  unmindful  of  the  restrictions  on  invest- 
ment powers  generally.  The  course  of  prices,  in  the  lead- 
ing dividend-paying  stocks,  from  September,  1906,  to  the 
subsequent  March,  and  the  volume  of  transactions  in  those 
months,  indicated  the  degree  of  correctness  with  which 
speculators  had  estimated  the  intensity  and  effectiveness  of 
the  investment  demand,  in  order  to  justify  the  general 
course  of  speculation  in  the  summer  of  1906  and  to  estab- 
lish the  approximate  correctness  of  its  forecasts,  it  would 
be  necessary  to  show  that  most  of  the  dividend-paying 
stocks,  which  speculators  particularly  favored  in  August, 
were  absorbed  shortly  afterward  by  investors  at  the  prices 
to  which  they  had  advanced.  But  was  this  the  case?  In 
the  protracted  general  decline,  extending  over  a  number  of 
months,  the  stocks  in  w^hich  transactions  maintained  a  large 
volume,  were  those  which  advanced  most  sharply  in  Aug;ust 


90  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [go 

and  September,  supposedly  in  response  to  an  investment 
demand  which,  during  those  months,  was  presumably  anti- 
cipated by  speculators.  The  expectations  of  speculators 
were  not  shown  to  have  been  wholly  incorrect  by  the  rates 
of  dividends  in  subsequent  months  or  years — not  even  in 
1908,  the  year  of  general  depression.  Dividends  on  Union 
Pacific,  Southern  Pacific,  and  Reading  have  not  been  low- 
ered since  August,  1906.  Nevertheless  the  prices  of  these 
three  stocks,  and  of  many  of  the  same  class,  underwent 
tremendous  declines.  It  is  difficult  to  see  how  any  other 
explanation  of  the  fall  of  prices  than  a  speculative  over- 
estimate of  the  investment  demand  during  the  autumn  of 
1906  and  the  following  winter,  can  be  regarded  as 
satisfying. 

President  Hadley  writes,  ''  When  speculation  anticipates 
an  actual  demand,  it  is  of  great  service  to  the  commun- 
ity ",'  and  further,  "  Legitimate  speculation  involves  anti- 
cipation of  the  needs  of  the  market  and  a  power  to  assume 
risks  in  making  contracts  to  meet  these  needs.  A  failure 
to  fulfil  either  of  these  requirements  makes  the  operation 
an  undesirable  one  for  the  public  to  tolerate."  ^  If  we  ac- 
cept President  Hadley's  test  of  the  legitimate  character  of 
speculation — that  it  "  anticipate  the  needs  of  the  market  " 
— and  then  recall  to  mind  the  events  on  the  New  York 
Stock  Exchange  during  1906  and  up  to  March,  1907,  we 
may  decide  Avhether  speculation,  as  it  manifested  itself 
in  those  fifteen  months,  in  the  words  of  Professor  Emery, 
''  consisted  in  assuming  the  inevitable  economic  risks  of 
changes  in  value  " — his  definition  of  speculation — or  in 
"  placing  money  on  the  artificially  created  risks  of  some 
fortuitous  event  ",^  as  he  defines  gambling  to  distinguish 
it  from  speculation. 

'Economics,  p.    no.  ^  Ibid.,  p.  124. 

®  Spejciilation  on  the  Stock  and  Produce  Exchanges  of  the  United 
States,  p.  10 1. 


CHAPTER  VII 

Speculative  ''Anticipation  of  the  Needs  of  the 
Market  " 

The  disastrous  outcome  of  Stock-Exchange  speculation 
in  1906  and  the  unsoundness  of  the  assumption  that  an  un- 
limited investment  power  existed  in  that  year  which,  through 
no  fault  of  the  speculators,  was  not  exercised,  make  it  ap- 
pear that  the  volume  of  speculative  commitments  for  the 
rise  went  far  beyond  the  actual  powers  of  investment  buy- 
ing. Indeed  it  seems  as  if  speculation  was  carried  on  with- 
out any  regard  to  the  extent  and  character  of  the  restricted 
investment  demand.  In  the  earlier  months  of  1906  specu- 
lation for  the  rise  showed  little  tendency  to  adjust  the 
volume  of  its  operations  to  investors'  capabilities;  and  in 
the  late  summer  and  early  autumn,  speculators  on  the  long 
side  of  the  market  seemed  to  have  extended  themselves  be- 
yond the  utmost  possibilities  of  any  investment  absorption 
which  might  have  set  in.  No  evidence  that  this  absorp- 
tion exerted  itself  has  been  produced,  either  at  the  rela- 
tively high  prices  on  the  Stock  Exchange  in  September, 
1906,  or  during  the  period  of  falling  prices  from  September 
to  the  subsequent  March  —  in  sufficient  strength,  at  any 
rate,  to  withdraw  from  speculators  the  stocks  in  which 
they  had  traded  most  extensively.  Speculation  in  1906 
seemed  to  reveal  a  tendency  to  advance  prices  far  beyond 
the  levels  at  which  investors  would  buy,  and  finally  brought 
general  disaster  on  those  who  acted  on  the  assumption  that 
an  unlimited  investment  demand  existed. 

91]  91 


Q2   SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [92 

This  brief  summary  of  speculative  activity  in  1906  does 
not  accord  with  the  conventional  conception  of  that 
phenomenon.  Engaged  in  this  form  of  activity,  accord- 
ing to  traditional  economic  supposition,  are  traders  of 
preternatural  acumen  and  foresight.  It  seems  almost  in- 
conceivable that  traders  endowed  with  such  rare  qualities 
could  seriously  miscalculate  the  urgency  of  the  demand  or 
the  extent  of  the  resources  at  the  command  of  the  inves- 
tors to  whom  the  final  sale  of  speculative  stocks,  it  was 
expected,  would  be  made.  If  those  who  participate  in 
speculation  possess  generally  such  a  high  degree  of  sagacity, 
it  does  not  seem  possible  that  they  should  have  been  guided 
in  their  activities  by  a  belief  regarding  the  possibilities  of 
investment  buying,  both  as  to  its  strength  and  characters 
which  proved  to  be  so  wide  of  the  truth. 

In  order  to  ascertain  the  possibility  that  speculation  can 
go  far  beyond  the  capacity  of  investment  absorption  in 
such  a  market,  we  may  first  of  all  consider  the  business  of 
a  Wall  Street  commission  house — that  is,  a  firm  of  brok- 
ers in  the  strict  sense — and  the  motives  which  would  lead 
the  members  of  one  of  these  firms  to  act  in  such  a  way 
as  to  conduct  its  business  most  profitably. 

Any  person  who  is  not  a  member  of  the  Stock  Ex- 
change, desiring  to  deal  in  securities  on  that  Exchange, 
must  do  so  through  a  broker  who  is  a  member  of  that  in- 
stitution. The  principal  of  this  broker  may  be  an  investor 
or  belong  to  any  one  of  the  four  classes  into  which  specu- 
lators— except  floor  traders — are  divided  in  the  report  of 
the  Hughes  Committee.'  That  is,  if  a  purchase  of  stocks, 
for  example,  is  desired,  the  principal  may  either  have  his 
broker  buy  them  and  then  pay  to  the  broker  the  full  pur- 
chase price  and  the  commission — that  is,  purchase  for  in- 

1  Vide  cli.  i.  p.   16. 


C)3]  ''NEEDS  OF  THE  MARKET''  93 

vestment;  or  else  he  may  deposit  only  a  part  of  the  pur- 
chase price  and  becomes  a  speculator  on  margin  for  the  rise. 
Thus  a  broker,  conducting  a  general  commission  business, 
has  two  classes  of  customers,  speculators  and  investors. 

It  is  to  the  Stock-Exchange  broker's  immediate  interest 
that  he  have  more  speculators  among  his  customers  than 
investors.  This  is  due  to  the  prevalent  rate  of  commission 
on  Stock-Exchange  purchases  and  sales.  The  authorities 
of  the  Exchange  have  prescribed  a  minimum  rate  of  com- 
mission which  the  broker  must  charge  for  services  ren- 
dered on  behalf  of  customers  who  are  not  members  of  the 
Exchange;  and  the  enforcement  of  this  minimum  rate  is 
rigorous  and  inflexible.  This  rate  —  amounting  to  one- 
eighth  of  one  per  cent,  of  the  par  value  of  the  shares 
bought  or  sold,  as  the  case  may  be,  or  12^  cents  on  each 
share  of  $100  par  value — is  the  same  on  a  transaction 
whether  it  be  for  the  account  of  a  speculator  or  an  in- 
vestor. A  higher  rate  may  of  course  be  charged,  but  prac- 
tically the  minimum  prevails,  with  few  exceptions,  among 
brokers  in  Wall  Street. 

The  actual  cost  to  the  broker  of  executing  a  speculative 
order  for  a  customer  is  much  less  than  that  of  carrying 
out  an  investment  order.  Speculative  transactions  are  usu- 
ally in  100-share  lots  of  stocks  or  multiples  thereof;  and 
the  sales  and  purchases  of  such  lots  can  be  made  to  offset 
each  other  on  the  Stock  Exchange  Clearing  House  sheet. 
On  this  sheet,  the  tickets,  the  books  of  the  firm,  and  the 
blotters,  comparatively  few  entries  altogether  need  be  made. 
Since  only  the  balances  of  stocks,  as  they  appear  on  the 
Clearing  House  sheet,  need  be  delivered  or  received,  the 
handling  of  securities  for  an  individual  speculator  is  al- 
most entirely  avoided.  The  only  details  connected  with 
margin  transactions  are  the  purchase  and  sale  on  the  floor 
of  the  Exchange,  some  routine  correspondence  and  a  few 


94      SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [g^ 

bookkeeping  entries.  Since  the  prevailing  unit  in  a 
transaction  on  margin  consists  of  one  hundred  shares,  the 
commissions  for  the  purchase  and  sale,  both  of  which  are 
necessary  to  the  completion  of  the  usual  speculative  oper- 
ation, amount  to  twenty-five  dollars  for  each  hundred 
shares. 

In  carrying  out  the  order — whether  it  consist  of  a  pur- 
chase or  a  sale — of  an  investor,  much  more  routine  work 
is  necessary.  Moreover,  each  transaction  requires  separ- 
ate individual  attention,  which  is  not  necessary  in  the  same 
degree  for  speculative  orders.  If  the  transaction  involves 
an  odd  lot,  that  is  a  number  of  shares  less  than  one  hun- 
dred— and  most  investment  orders  are  of  this  character — 
it  cannot  go  through  the  Clearing  House.  The  transaction, 
after  the  sale  or  purchase  on  the  floor  is  reported,  must  be 
*'  compared  ",  that  is,  it  must  be  confirmed  by  the  respective 
office  forces  of  the  two  brokers  who  enter  into  the  trans- 
action. Since  odd-lot  sales  are  not  cleared,  the  delivery 
and  receipt  of  the  stock  involved  in  the  transaction  must 
be  performed  separately  in  each  case.  Then,  finally,  if  the 
investor  be  a  purchaser,  his  broker  must  usually  arrange 
for  the  transfer  of  the  stock  into  the  principal's  name,  with 
all  the  care  in  clerical  work  and  in  handling  the  securities 
which  that  series  of  operations  requires.  All  these  routine 
details  are  as  necessary  for  the  purchase  and  transfer  of 
one  share  as  for  the  same  operations  applied  to  ninety-nine 
shares.  But  the  prevailing  charge,  in  the  case  of  one  share, 
is  one-ninety-ninth  of  that  exacted  in  a  purchase  of  ninety- 
nine  shares.  For  small  odd  lots,  indeed,  it  is  doubtful 
whether  the  commission,  I2><  cents  for  each  share,  yields 
any  profit  to  the  broker  when  allowance  is  made  for  the 
cost  and  trouble  involved  in  the  series  of  acts  outlined 
above. 

The  prevailing  rate  of  commission  is  charged,  irrespec- 


95]  "NEEDS  OF  THE  MARKET''  gc^ 

tive  of  the  character  of  the  transaction — speculative  or  in- 
vestment— and  without  regard  to  the  greater  or  less  num- 
ber of  shares.  It  is  therefore  obviously  to  the  individual 
broker's  interest  that  he  should  have  as  great  a  number 
of  speculative  orders  as  possible — involving  lOO-share  lots 
of  stock — and  not  too  many  odd-lot  investment  purchases 
to  carry  out.  As  for  the  latter,  it  may  be  said  that  orders 
of  this  nature  have,  so  far  as  is  known,  never  been  gener- 
ally discouraged  by  brokers ;  but  from  individual  brokers 
this  relatively  unprofitable  class  of  business  meets  with  only 
a  passive  reception.  Of  course,  it  is  handled  diligently 
and  honestly,  almost  without  exception,  by  brokers  on  the 
Stock  Exchange.  But  such  encouragement  to  trade  in 
stocks  as  the  rules  of  the  Exchange,  the  ethics  of  the  busi- 
ness and  the  conscience  of  the  broker  permit  him  to  extend 
to  his  customers,  is  directed  toward  speculation  rather 
than  investment — that  is,  with  regard  to  transactions  in 
those  stocks  which  are  listed  on  the  Exchange.  The  fol- 
lowing of  customers  which  a  broker  may  have,  and  to 
which  he  desires  to  add  continually  fresh  accessions,  con- 
sists chiefly  of  speculators  rather  than  of  investors;  and 
whatever  efforts  he  is  permitted  to  put  forth  in  attracting 
new  customers  are  bent  toward  having  them  speculate. 

Thus  in  1906,  as  will  always  be  the  case  under  the  pre- 
vailing rate  of  commission,  those  numerous  members  of 
the  Stock  Exchange  who  were  chiefly  occupied  in  acting  as 
brokers,  in  the  strict  sense,  each  for  a  greater  or  less  num- 
ber of  principals,  were  interested  in  having  their  respective 
customers  engage,  for  the  most  part,  in  speculation  on  mar- 
gin ;  they  did  not  seek  to  stimulate  investment.  Each 
broker  probably  knew  in  a  general  way  that  many  other 
brokers'  respective  interests  were  identical  with  his,  as  re- 
garded the  character  of  their  customers'  transactions,  and 
that  every   other  broker  presumably  would   strive  to   at- 


g)6     SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [96 

tract  speculative  orders  and  would  be,  at  best,  coldly  re- 
ceptive toward  orders  from  investment  purchasers.  None 
of  these  brokers  could  know — since  each  kept  the  details 
of  his  business  to  himself — what  the  extent  of  speculative 
commitments  in  various  stocks  might  be;  nor  could  he 
know  of  the  rate  at  which  investment  absorption  or  un- 
loading was  generally  proceeding,  except  insofar  as  he 
could  draw  inferences  from  the  character  of  his  own  par- 
ticular business.  The  broker's  chief  concern  was  to  have 
as  large  a  volume  of  speculative  orders  given  him  as  pos- 
sible. If  he  was  not  interested  in  encouraging  invest- 
ment, and  knew  that  few  other  brokers  were  doing  so,  he 
looked  to  the  attractions  offered  by  many  stocks  from  time 
to  time  on  the  Exchange  to  draw  investing  purchasers. 
The  latter  presumably  would  retire  the  speculative  commit- 
ments into  which  his  own  customers  and  those  of  other 
brokers  had  entered.  Brokers  generally  held  to  the  com- 
mon belief  that  investment  buying  of  unlimited  extent 
would  set  in  tow^ard  any  stock  that  displayed  the  quali loca- 
tions which  presumably  appealed  to  investors,  in  the  way 
of  yielding  a  steady  income. 

The  class  which  constitutes  the  general  speculative 
"  public  ",  in  such  a  year  as  1906,  is  as  hard  to  characterize 
particularly  as  is  the  imaginary  swarm  of  investors  as- 
sumed to  have  been  hovering  over  the  market  during  that 
year.  As  has  been  said,  the  speculators  came  from  every 
walk  in  life  occupied  by  those  \yho  have  at  hand  several 
hundred  or  a  few  thousand  dollars  apiece — business  or  pro- 
fessional— and  possessing  every  possible  degree  of  intelli- 
gence. Perhaps  classes  (4)  and  (5)  of  the  patrons  of  the 
Stock  Exchange,  as  those  were  designated  by  the  report  of 
the  Hughes  Committee,  furnish  as  close  a  (lescri])tion  as  we 
shall  ever  obtain :  these  are : 


gy]  "NEEDS  OF  THE  MARKET"  gy 

(4)  Outside  operators,  having  capital,  experience  and  knowl- 
edge of  the  general  conditions  of  business.  ... 

(5)  Inexperienced  persons,  who  act  on  interested  advice, 
"  tips,"  advertisements  in  newspapers,  or  circulars  sent  by 
mail,  or  "  take  flyers  "  in  absolute  ignorance,  and  with  blind 
confidence  in  their  luck.  .  .  . 

As  was  pointed  out,  the  large  body  of  speculators  for  the 
rise  in  1906 — or  at  any  other  time,  for  that  matter — were 
not  primarily  concerned  with  the  character  of  the  purchasers 
to  whom  they  finally  sold  in  completing  their  several  trades 
— whether  investors  or  speculators.  Such  attention  as  they 
gave  to  the  advice  of  others,  to  the  earnings  of  the  cor- 
porations in  w^hose  stocks  they  were  severally  interested 
and  to  the  general  prosperity  of  the  country,  together  with 
the  extent  of  their  respective  resources,  guided  them  in 
the  conduct  of  their  operations.  Inquiry  into  the  sound- 
ness of  the  assumption  as  to  the  extent  of  the  investment 
demand  for  particular  stocks  did  not  appear  necessary  to 
them.  Probably  this  class  shared  the  generally  foggy  ap- 
prehension of  the  economic  transformations  which  had 
taken  place  since  the  Spanish  War,  and  had  also  shared  the 
rather  wide  diffusion  of  prosperity  which  went  along  w^ith 
those  transformations.  For  the  most  part,  the  individual 
members  of  the  speculative  class  w^ere  not  entirely  occu- 
pied in  following  the  course  of  the  stock  market.  Such 
men  as  were  living  on  independent  incomes  frequently  had 
numerous  interests  outside  Wall  Street.  Those  specula- 
tors "  on  the  side,"  w^ho  were  engaged  in  various  occupa- 
tions removed  from  the  stock  market,  found  much  in  the 
active  period  of  1906  to  divert  their  attention  from  events 
in  the  financial  district.  And,  moreover,  if  most  of  them  did 
not  risk  all  their  property  or  any  very  considerable  part 
of  it  on  the  success  of  their  different  ventures,  they  w^ere 
rather  inclined  to  limit  the  extent  of  their  possible  losses 


gS      SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE    [gg 

by  placing  ''  stop  orders "  with  their  brokers.  Few  of 
them  stood  ready  to  abide  by  their  commitments  in  the 
event  of  a  prolonged  decline  in  prices.  They  were  of  the 
class  w^hich  would  buy  heavily  on  a  sharply  rising  market, 
tending  by  the  extent  of  their  combined  purchases  to  raise 
prices  still  further,  and  would  sell  freely  on  a  sharp  de- 
cline, making  it  still  sharper. 

However  undesirable  the  above  class  of  speculators  may 
be,  from  the  standpoint  of  the  common  interest,  they  were 
sufficiently  acceptable  as  brokers'  customers.  Throughout 
1906,  as  at  times  for  several  years  previous,  their  orders 
were  taken  in  large  volume,  and  executed  with  striking 
effect.  In  such  months  as  October  and  November,  1904, 
March,  April  and  December,  1905,  January  and  August, 
1906,  these  outside  speculators  were  particularly  prominent 
and  numerous  in  the  stock  market,  and  in  March,  1907,  was 
beheld  their  final  manifestation  in  large  numbers  during 
the  period  we  are  considering. 

In  actually  bringing  these  speculators  to  the  market  in 
such  hordes,  the  brokers  could  not  of  course  be  the  prime 
movers.  The  effect  on  the  popular  mind  of  the  striking 
economic  and  financial  phenomena  previous  to  1904,  and 
the  rise  of  prices,  which  was  occasionally  so  striking,  had 
acted  upon  many  people  in  such  a  way  as  to  direct  them 
toward  stock  speculation.  As  it  happened,  many  persons 
inclined  in  that  direction  in  1906  had  the  means  to  gratify 
their  inclinations.  The  brokers,  whom  they  had  to  em- 
ploy in  order  to  engage  in  speculation,  were  of  all  things 
loath  to  discourage  speculation  among  their  customers. 
In  fact,  the  chief  activities  of  brokers  in  1906,  as  at  other 
times,  consisted  in  getting  in  touch  with  just  such  a  class 
as  the  potential  speculators  made  up  and  in  encouraging 
them  to  undertake  ventures  in  the  stock  market. 

The  brokers,  it  has  been  said,  played  a  part  in  the  pro- 


99]  ''NEEDS  OF  THE  MARKET"  99 

motion  of  speculation  which  was  not  very  active.  The 
existence  of  a  large  class  of  potential  speculators  depended 
on  conditions  largely  beyond  the  control  of  the  commis- 
sion houses.  But  these  houses  naturally  extended  every 
facility  at  their  command  to  welcome  the  coming  of  the 
large  class  of  speculative  customers.  Since  the  prevailing 
rate  of  commission  and  the  differing  characters  of  trans- 
actions for  speculative  and  for  investment  purposes  made 
the  investors  much  less  profitable  than  the  speculators  to 
the  brokers,  speculative  customers  were  more  welcome  to 
the  brokers  than  were  investing  purchasers.  Provided  then 
that  speculators  came  forward  in  sufficiently  large  numbers 
and  the  investing  class  did  not,  of  its  own  accord  and  with- 
out active  encouragement,  manifest  itself  by  heavy  pur- 
chases which  would  keep  step  with  speculative  commitments, 
over-speculation  was  inevitable. 

Over-speculation,  arising  as  we  have  indicated,  does  not 
necessarily  impose  checks  upon  itself,  as  it  was  conducted 
in  1906.  As  the  volume  of  speculative  commitments,  ac- 
companying the  rise  of  prices,  expands,  it  may  far  exceed 
the  extent  of  investment  buying  so  long  as  fresh  specula- 
tive purchases  continue  to  be  made.  Of  course  the  process 
must  end,  when  the  speculators  cease  their  purchases 
through  lack  of  further  means  or  from  disinclination  to 
venture  further,  and  general  investment  buying  does  not 
step  in  to  retire  the  heavy  aggregate  of  commitments  for  the 
rise  which  have  been  made.  When  the  limits  of  the  re- 
sources, which  speculators  are  willing  or  able  to  devote  to 
providing  their  requisite  margins,  have  been  reached  with- 
out the  intervention  of  investment  buying,  prices  will  in- 
evitably fall,  whatever  may  be  the  supposed  attractions  of 
various  stocks  to  hypothetical  investors.  And  the  extent 
of  the  ensuing  decline  will  depend  partly  on  the  excess  of 
the  speculative  commitments  for  the  rise  over  the  actual 


lOO  SPECULATION  ON  NEIV  YORK  STOCK  EXCHANGE  [ico 

investors'  purchases  at  the  highest  price  levels,  and  partly 
on  the  amount  of  investing  purchases  which  are  made  as 
prices  fall. 

It  may  be  objected  that  the  growing  need  of  funds  for 
speculators,  which  would  be  manifested  by  a  rise  of  call 
rates  if  the  speculators  unduly  over-estimated  the  demands 
of  investors,  would  tend  to  act  as  a  corrective  to  over- 
speculation  by  bringing  about  a  rise  in  the  level  of  inter- 
est rates  on  call  loans.  As  the  stock  market  in  New  York 
is  organized  to  handle  public  speculation,  however,  the  rise 
or  fall  of  call  rates  does  not  directly  affect  outside  specu- 
lators. The  interest,  which  they  are  charged  by  their 
brokers,  is  computed  on  the  basis  of  a  fixed  rate,  say  6  per 
cent,  in  times  either  of  ease  or  of  stringency  in  the  money 
market.  In  such  months  as  September,  1904,  the  interest 
rate  with  which  customers  are  charged  is  not  generally  low- 
ered to  2  per  cent.  Nor  in  such  months  as  November,  1906. 
is  the  rate  of  interest  charged  customers  as  high  as  25  per 
cent.  The  brokers  themselves  are  the  parties  to  stock 
speculation  upon  whom  high  interest  rates  bear  heavily  in 
times  of  stringency.  But  since  all  brokers  are  not  charged 
the  maximum  rate  each  day  by  lenders,  and  since  those  who 
pay  the  highest  rates  are  comparatively  few  in  number, 
this  direct  pressure  of  high  call  rates  on  the  brokers  does 
not  operate  very  effectively  to  check  speculation  on  the  part 
of  their  customers.  About  the  only  action  these  high  rates 
can  exert  is  in  the  nature  of  inducing  the  brokers  to  per- 
suade some  bullish  customers  to  reduce  their  commitments 
This  action  is  neither  generally  immediate  nor  very  ef- 
fective in  reducing  the  volume  of  speculation. 

Furthermore,  we  can  hardly  regard  the  prevalence  of  low 
call  rates  as  a  very  powerful  stimulant  to  speculation.  Mr. 
Horace  White  has  pointed  to  low  rates,  which  endure  for 


lOi]  "NEEDS  OF  THE  MARKET"  lOi 

extended  periods,  as  tending  to  ''  incite  speculation."  ^  It 
is  implied,  both  in  his  direct  statement  to  that  effect  and  in 
two  passages  of  the  Hughes  Committee's  report,^  that  low 
call  rates  act  immediately  and  directly  to  swell  the  volume 
of  speculative  commitments.  We  have  seen  that,  because 
of  the  incidence  of  the  high  rates  upon  the  brokers,  the  rise 
of  call  rates  does  not  act  as  a  direct  check  on  the  operations 
of  outside  speculators.  And  since  the  brokers  do  not  lower 
the  rate  of  interest  charged  their  customers  when  the  call 
rate  falls  very  low,  the  quotation  of  low  rates  does  not 
serve  directly  to  encourage  speculation  on  the  part  of  the 
outside  "  public."  If  the  general  body  of  speculators  were 
commonly  charged  the  quoted  rates  on  their  margin  ac- 
counts, they  would  doubtless  prove  quickly  responsive  to 
changes  in  those  rates  by  extending  their  commitments  as 
call  rates  fell  and  reducing  them  appreciably  as  those  rates 
rose.  But  the  brokers  intervene  between  the  lenders  of 
call  money  and  the  general  body  of  speculators,  gaining  all 
the  advantage  of  low  rates  and  bearing  all  the  burden  of 
high  rates,  so  that  the  operations  of  the  speculators  are  not 
in  general  affected  directly  by  changes  in  call  rates.  Only 
to  the  extent  that  brokers,  who  are  able  to  obtain  call  funds 
at  prevailing  low^  rates,  undertake  to  speculate  on  their  own 
account,    do   low    rates    incite   speculation   directly.       But 

^Annals  of  the  American  Academy  of  Political  and  Social  Science, 
vol.  xxxvi,  p.  565. 

3  Extracts  from  the  Report  of  the  Hughes  Committee — 

"...  There  almost  annually  recurs  an  inordinately  low  rate  for 
*  call  loans ',  at  times  less  than  i  per  cent.  During  the  prevalence  of 
this  abnormally  low  rate  speculation  is  unduly  incited,  and  speculative 
loans  are  very  largely  expanded.  .  .  . 

"...  The  repeal  of  the  statute  [exempting  demand  loans  of  $5,000, 
or  more,  secured  by  collateral,  from  the  scope  of  the  New  York  State 
usury  law]  would  affect  only  the  conditions  when  high  rates  of  interest 
are  exacted,  and  not  those  of  abnormally  low  rates,  which  really  pro- 
mote excessive  speculation." 


I02  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE  [102 

brokers'  operations  of  this  sort  have  played  relatively  slight 
part  in  periods  of  pronounced  over-speculation.  The  sus- 
tained heavy  volume  of  speculative  transactions,  during  the 
period  we  are  studying  particularly,  had  its  rise  in  a  wide- 
spread participation  in  the  market  of  a  large  class  of  out- 
side speculators.  These  speculators,  unable  to  gain  any  ad- 
vantage from  relatively  low  call  rates,  were  not  incited  to 
speculation  by  the  latter.  At  least  the  universally  custom- 
ary practice  of  brokers  in  maintaining  the  constancy  of  the 
interest  rates  they  charge  their  customers  does  not  appear 
to  offer  a  direct  incitement  to  speculation.  And  no  in- 
ductive study  of  call  rates  and  speculative  activity — or  over- 
speculation — has  shown  that  any  correlation  between  the 
two  exists. 

It  is  in  the  collective  emotions  of  the  general  body  of 
speculators,  and  in  the  resources  which  they  feel  inclined 
to  risk  on  the  course  of  the  stock  market,  that  the  volume 
of  speculation  takes  its  rise.  If  the  stories  of  vast  fortunes 
made  in  financial  operations  and  the  movement  of  prices  on 
the  Stock  Exchange  seem,  in  the  popular  opinion,  to  present 
opportunities  for  successful  speculation,  we  may  look  for 
a  heavy  volume  of  speculative  commitments  for  the  rise; 
provided  that  there  are  many  persons  of  ample  means,  as 
we  have  indicated,  who  will  respond  readily  to  such  stimuli 
as  the  events  of  1906  and  the  few  preceding  years  furnished. 

In  a  market  where  many  outside  speculators  are  present, 
prices  reflect  primarily  the  general  strength  or  weakness  of 
the  speculative  position.  This  position  is  determined  by 
the  correctness  or  the  falsity  of  the  estimate,  which  specu- 
lators make  and  on  which  they  act,  of  the  investors'  demand, 
existing  or  prospective;  and  also  by  the  extent  to  which 
fresh  speculative  commitments  for  the  rise  are  tending  to 
raise  prices  or  by  the  point  of  time  at  which  the  volume  of 
new  ventures  is  appreciably  reduced  with  more  or  less  sud- 


103]  ''NEEDS  OF  THE  MARKET"  103 

denness.  Speculators  in  such  a  market  can  do  little  more 
than  indicate,  by  their  operations,  the  secure  or  perilous 
state  of  their  own  separate  situations  with  respect  to  the 
concurrent  state  of  the  market;  they  are  hardly  able  to 
"  discount  "  events  many  months  in  the  future,  as  Professor 
Huebner  asserts  that  they  did  in  the  latter  part  of  1906.* 
His  summary  interpretation  of  the  speculators'  actions  at 
that  time  runs  as  follows : 

.  .  .  Not  only  does  the  stock  market  afford  a  valuable  pro- 
tection to  the  holder  of  securities  and  direct  the  flow  of  cap- 
ital, but  it  also  serves  a  most  useful  purpose  to  all  business 
men  by  "  discounting  the  future  "  and  by  thus  affording  a 
register  of  prospective  values  for  property  other  than  that 
listed  on  the  exchanges.  It  is  this  discounting  process  which 
has  given  our  stock  exchange  the  appellation  of  "  barometer 
of  future  business  conditions."  As  pointed  out  in  other  papers 
of  this  volume,  speculation  deals  with  the  future  and  not  with 
the  present  or  the  past.  The  stocks  and  bonds  of  our  corpora- 
tions aggregate  so  large  a  proportion  of  the  world's  wealth, 
and  represent  such  a  variety  of  industries,  that  a  marked  rise 
or  decline  in  the  general  level  of  prices  is  the  surest  indica- 
tion— in  fact,  an  almost  unfailing  index  of  coming  prosperity 
or  depression.  And  the  all-important  fact  is,  that  such  changes 
of  prices  on  the  exchanges  always  precede,  that  is  to  say,  dis- 
count the  event,  and  do  not  follow,  or  occur  concurrently. 
Without  an  exception,  every  business  depression  in  this  coun- 
try has  been  discounted  in  our  security  markets  from  six 
months  to  two  years  before  the  depression  became  a  reality. 

The  financial  and  business  panic  of  1907  serves  as  the  latest 
illustration  of  the  significant  fact.  The  business  conditions  of 
1906  were  the  best  that  this  country  has  ever  enjoyed.  Mills 
were  running  overtime,  railroads  were  congested  with  traffic, 
and  real  estate  operations  were  booming.    The  press  was  filled 

^Annals  of  the  American  Academy  of  Political  and  Social  Science, 
vol.  XXXV,  p.  13  (494). 


I04  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE  [104 

with  the  most  roseate  "  write-ups  "  and  predictions,  yet,  de- 
spite the  good  news,  security  prices  showed  Httle  gain  follow- 
ing the  month  of  August.  The  earmarks  of  coming  financial 
and  business  distress  were  at  hand.  The  stock  market  was 
serving  its  purpose  as  the  pivotal  point  where  thousands  of 
the  brainiest  men  of  the  world  were  acting  on  judgments 
which  had  reference  to  the  future  and  not  to  the  present. 
Stocks  were  for  sale  by  those  who  reasoned  correctly  and 
knew,  and  were  purchased  by  those  who  did  not  know  so 
much.  They  were  even  sold  at  a  sacrifice,  and  as  knowledge 
of  the  coming  state  of  business  afifairs  percolated  from  one 
stratum  of  investors  to  another,  the  selling  movement  be- 
came more  violent,  and  in  March  of  1907  we  had  our  first 
stock-exchange  panic.  A  rebound  in  prices  occurred,  but  stocks 
were  still  for  sale,  and  in  July  we  had  our  second  panic.  In 
the  meantime,  however,  business  was  excellent,  and  the  press 
of  nearly  the  whole  country  wondered  what  all  the  trouble 
was  about,  and  why  the  Wall  Street  gamblers  were  thus  losing 
their  senses.  The  business  depression,  however,  followed,  and 
when  it  was  a  reality  to  even  the  most  ignorant,  the  stock 
market  had  clearly  discounted  the  event,  and  prices  of  securi- 
ties refused  to  yield  further.  When  business  was  at  its  worst, 
and  the  public  press  blue  as  indigo,  stock-market  prices  were 
again  merrily  ascending.  The  exchange  was  again  the  pivotal 
point  where  thousands  of  the  best  minds  of  the  country  were 
expressing  their  judgment  of  the  future,  and  were  willing  to 
convert  their  cash  into  securities,  because  of  the  anticipated 
increase  in  value. 

This  ascription  of  the  "  discounting  "  faculty — founded 
on  the  familiar  saying,  of  doubtful  accuracy,  "  Wall  Street 
discounts  everything  "  —  to  the  operations  of  speculators, 
throughout  the  autunm  of  1906  and  the  greater  part  of 
1907,  is  rather  obscure  in  its  implications.  What  was 
"  discounted  ",  for  instance,  in  the  decline  of  Union  Pacific's 
price  from  i9SH>^  its  highest  point  recorded  September  13, 


I05]  ''NEEDS  OF  THE  MARKET"  105 

1906,  to  120)4,  in  the  following  March,  and  later  to  100, 
October  24,  1907?  On  this  stock  a  dividend  at  the  annual 
rate  of  10  per  cent  had  been  earned  the  previous  fiscal  year, 
ending  June  30,  1906,  with  a  comfortable  margin  of  surplus. 
Ever  since  that  year,  L'nion  Pacific  has  continued  to  pay 
10  per  cent,  dividends  and  to  earn  them  with  the  utmost 
ease.  If  we  are  to  assume  that  the  market  price  of  a  stock 
represents  the  collective  opinion  of  its  capacity  for  paying 
steady  dividends,  the  "  discounting  ",  reflected  in  the  fall 
of  price,  amounting  to  ysVs  points  in  six  months,  seems 
rather  puzzling.  If  1908  had  been  characterized  by  the 
general  passing  of  dividends  on  stocks  listed  on  the  Ex- 
change, which  suffered  enormous  declines  of  price  between 
the  summer  of  1906  and  the  following  spring,  we  might  be 
willing  to  ascribe  preternatural  foresight  and  intelligence  to 
the  speculators  who  were  active  in  September  and  October, 
1906.  But  the  objective  qualifications,  possessed  by  most 
of  the  dividend-paying  stocks,  which  it  was  assumed  in 
1906  would  render  them  highly  desirable  for  investment 
purposes,  were  retained  in  large  part  by  those  stocks  dur- 
ing 1907  and  the  succeeding  year  of  depression.  As  to  the 
barometric  service  rendered  by  the  general  decline,  which 
began  in  the  autumn  of  1906,  it  seems  to  have  been  rather 
costly  to  those  who  provided  it,  and  little  appreciated  by 
those  whom  it  was  assumed  to  have  benefited. 

The  whole  conception  of  "  discounting  ",  as  one  of  the 
stock  market's  chief  functions,  is  based  on  the  hypothesis, 
commonly  accepted  without  question,  that  ''  a  slight  fluctu- 
ation in  the  value  of  a  product  tends  to  produce  a  violent 
fluctuation  in  the  value  of  the  establishment  producing  it."  ' 
This  principle  is  currently  believed  to  explain  fully  the 
movements,  over  a  long  period  and  to  a  wide  extent,  of 

^  T.  N.  Carver,  "  A  Suggestion  for  a  Theory  of  Industrial  Depres- 
sions," Quarterly  Journal  of  Economics,  vol.  xvii,  p.  497. 


Io6  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE  [io6 

prices  in  the  stock  market.  Even  accompanied  by  the 
qualifications  Professor  Car^^er  imposes  in  his  statement  of 
this  principle,  as  it  is  given  above,  we  cannot  regard  the 
''  general  law  "  as  an  adequate  explanation  of  stock  market 
price  movements  or  as  a  safe  foundation  on  which  to  erect 
the  theory  of  the  ''  discounting  "  function.  At  best  it  can 
only  be  true  when  investors  in  a  market  far  exceed  the 
speculators  in  numbers  and  in  the  volume  of  their  trans- 
actions, and  also  when  the  speculators  have  at  their  com- 
mand resources  ample  to  protect  them  against  slight  or 
Serious  miscalculations  in  their  forecasts.  This  principle 
can  only  hold  good  also  when  all  the  profits  of  a  railroad 
or  of  an  industrial  corporation  are  distributed  periodically 
among  the  owners.  When  the  owners,  for  example  a  mul- 
titude of  stockholders,  generally  receive  annually  a  fixed 
amount  on  each  share  of  their  stock  holdings,  and  the  com- 
pany almost  always  earns  more  than  is  needed  for  the 
distribution  of  these  dividends,  slight  fluctuations  in  the 
excess  of  profits  over  dividends  should  hardly  be  reflected 
in  the  capitalized  amounts  of  those  fluctuations  in  the  price 
of  the  stock.  For  instance,  the  Great  Northern  Railway 
earned  in  the  successive  fiscal  years,  from  1909  to  19 12 
inclusive,  respectively,  8.33,  8.47,  8.34,  and  10.31,  per  cent 
on  its  capital  stock,  in  amounts  available  for  dividends. 
But,  during  each  year,  it  paid  only  7  per  cent,  dividends  on 
its  one  class  of  stock.  If  its  practice  had  been  to  distribute 
the  entire  surplus  among  its  stockholders  each  year,  with- 
out harm  to  its  equipment,  slight  fluctuations  in  the  amount 
of  net  earnings  would  probably  have  been  followed  by  rela- 
tively violent  fluctuations  in  the  market  price  of  its  stock. 

However,  the  practice  of  distributing  among  stockholders 
only  a  part  of  the  sums  available  for  dividends  senses  to 
weaken  the  operation  of  the  tendency  indicated  by  Pro- 
fessor Carver.     As  he,  moreover,  presents  the  qualification, 


107]  "NEEDS  OF  THE  MARKET"  107 

"  the  fluctuations  in  the  value  of  producers'  goods  are  never 
actually  so  violent  as  the  foregoing  illustrations  have  sup- 
posed, mainly  for  the  reason  that  not  every  rise  or  fall  in 
the  value  of  products  is  believed  to  be  permanent."  Unless 
the  ''  general  law  " — in  its  unqualified  form — operates  to  its 
fullest  extent,  "  discounting  the  future  "  by  speculators  will 
not  in  general  be  very  effective.  And,  furthermore,  un- 
less the  general  decline  of  prices  on  the  Stock  Exchange, 
which  proceeded  quite  steadily  from  September,  1906,  to 
October,  1907,  can  be  shown  to  have  foreshadowed  a  gen- 
eral, sweeping  reduction  of  dividends,  which  was  to  have 
a  certain  character  of  permanence,  the  explanation  of  the 
prolonged  decline  in  question  cannot  be  obtained  by  recourse 
to  speculative  "  discounting." 

So  far  as  the  individual  outside  speculator  is  concerned, 
his  immediate  interest,  as  he  sees  it,  is  not  closely  bound 
up  with  having  a  pressing  investment  demand  act  upon  the 
market.  If  he  purchases  a  given  stock  and  afterward  other 
speculators  purchase  the  same  stock  in  sufficient  aggre- 
gate amount  to  advance  the  price  beyond  the  point  at  which 
the  first  speculator  bought,  he  can,  if  he  desires  to  convert 
his  gains,  sell  to  another  speculator  at  an  advanced  price, 
just  as  much  to  his  immediate  advantage  as  if  he  sold  to 
an  investor.  When  the  speculator,  whose  account  shows  a 
profit  on  his  purchase,  decides  to  sell  and  obtain  his  profit, 
the  chief  focus  of  his  attention  is  the  price  at  which  he 
can  sell — regardless  of  the  purchaser's  being  another  specu- 
lator or  an  investor.  He  may  of  course  consider  the  pos- 
sibility of  manipulation's  part  in  fixing  the  price  of 
his  particular  stock.  But  the  actual  strength  of  the  invest- 
ment demand  is  never  considered  a  factor  which  may  ])e 
potent  in  determining  the  price  of  a  given  stock  at  any 
one  time. 

Those  banking  institutions  or  other  agencies  which  lend 


I08  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE  [io8 

money  on  demand  to  Stock-Exchange  speculators  are 
not  directly  interested  in  the  correctness  of  the  speculative 
anticipation  of  the  market's  needs.  The  Stock-Exchange 
market  for  call  money  is  primarily  a  convenience  to  lenders. 
When  the  bankers,  individually  or  collectively,  have  in  their 
hands  funds  which  will  remain  with  them  for  an  undeter- 
mined period,  the  demand  for  loans,  readily  payable  on 
demand,  furnished  by  the  speculators,  provides  lenders  with 
the  means  of  employing  those  funds  profitably  for  as  long 
or  as  short  a  period  as  the  funds  in  question  are  left  at  their 
disposal  in  whole  or  in  part.  Thus  the  national  banks, 
trust  companies,  private  banking  houses,  agencies  of  for- 
eign banks — all  the  various  lenders  of  funds  in  the  form  of 
Wall  Street  demand  loans — regard  that  part  of  the  money 
market,  in  which  such  loans  are  made,  as  chiefly  a  con- 
venience to  themselves  individually  and  collectively.  The 
relatively  secure  basis  for  the  great  bulk  of  demand  loans 
does  not  necessitate  a  very  careful  scrutiny  of  the  investors' 
effective  demand  as  compared  with  the  aggregate  volume  of 
open  speculative  accounts.  The  lenders  generally  assume 
the  existence  of  a  speculative  demand  for  call  money  which 
is  practically  without  limit.  Although  the  supply  of  avail- 
able funds  may  be  very  extensive  as  compared  with  the 
speculative  demand  so  that  the  call  rates  may  fall  as  low 
as  I  per  cent,  at  times,  the  assumption  of  a  limitless  specu- 
lative demand  is  in  general  a  safe  one  to  make  for  practical 
purposes — at  least  the  level  of  call  rates  at  any  time  will  af- 
ford a  sensitive  index  of  its  soundness. 

Since,  with  the  more  conservative  lenders,  the  call  money 
market  is  only  a  convenient  field  in  which  funds,  that  other- 
wise would  have  to  lie  idle,  may  be  employed,  those  who 
lend  greater  or  less  sums  on  call  have  no  immediate  inter- 
est in  checking  or  in  inciting  speculation.  The  interests  of 
any  one  banking  institution  differ  from  those  of  others  to 


109]  ''NEEDS  OF  THE  MARKET"  109 

such  a  degree  as  to  prevent  the  banks,  or  any  considerable 
number  of  them,  from  combining  to  seek  the  repression  of 
over-speculation  if  the  latter  manifests  itself.  The  develop- 
ment of  the  mechanism  for  lending  money  on  the  Stock  Ex- 
change has  gone  so  far  that,  even  in  such  a  panic  as  that 
of  March  14th,  1907,  the  lenders  have  slight  occasion  to 
fear  that  they  will  incur  losses  on  their  outstanding  loans 
So  that  the  prospect  of  an  excessive  over-estimate  of  the 
investment  demand,  on  the  part  of  speculators,  which  may 
be  clearly  indicated  to  careful  observers,  and  the  likelihood 
that  such  an  over-estimate  will  end  in  a  severe  panic,  do  not 
tend  to  bring  about  the  curbing  of  speculation  by  those  who 
are  accustomed  to  finance  speculation  by  means  of  call  loans. 
Lenders  in  the  money  market  need  have  no  close  oversight 
of  the  tendency  of  speculative  anticipation  to  go  far  be- 
yond the  investment  demand. 

There  is  no  factor,  as  far  as  the  organization  of  the  Nca 
York  Stock  Exchange  and  the  conduct  of  sales  under  its 
rules  of  procedure  have  been  developed,  which  would  act 
as  a  restraint  on  over-speculation.  The  essential  condi- 
tion for  excessive  speculation  on  a  large  scale  lies  in  the 
presence  and  participation  of  a  number  of  individuals,  each 
one  convinced  of  his  ability  to  gain  by  speculation  or  rather 
careless  of  the  amount  he  may  lose  in  that  form  of  activity. 
If  the  utility  to  each  speculator  of  the  amount  he  risks  on  his 
ventures  is  not  very  large,  he  may  not  make  any  careful 
study  on  which  he  will  base  his  forecasts.  However  the 
amounts,  which  individual  outside  speculators  stand  to  lose, 
are  limited — partly  by  the  fact  that  most  speculators  of  the 
kind  mentioned  have  absorbing  interests  removed  from  the 
stock  market.  They  have  not  the  strong  inducements  to 
carry  stocks,  which  they  have  bought  on  margin,  over  a 
period  of  falling  prices  and  depression,  that  would  be  pre- 
sented to  those  who  are  speculators  by  profession.     Individ- 


no  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE  [no 

ual  speculators'  losses,  in  1906  and  1907  at  any  rate,  have 
not  of  late  amounted  to  great  sums.  Only  when  the  num- 
ber of  speculators  becomes  exceedingly  large  and  remains 
so  throughout  an  extended  period  of  falling  prices,  will  the 
aggregate  of  losses  sustained  by  unfortunate  speculators  for 
the  rise  attain  a  considerable  volume.  A  period  of  the  sort 
indicated  will  follow  either  an  excessive  speculation  in  the 
face  of  restricted  buying — which  may  conceivably  occur 
in  a  time  of  abounding  prosperity — after  further  specula- 
tive commitments  for  the  rise  tend  to  decrease  in  amount, 
or  else  it  may  follow  a  high  degree. of  speculative  activity 
which  is  interrupted  by  the  occurrence  of  some  event  that 
renders  a  given  security  or  all  those  of  a  certain  class  un- 
desirable for  investment  purposes.  In  the  latter  case,  the 
distrust  will  be  shared  by  speculators  with  investors,  so  that 
the  fonner  will  retire  their  commitments  much  more  rapidly 
than  they  would  do  if  the  decline  of  prices  followed  ex- 
cessive speculation  in  a  period  of  apparently  boundless,  ex- 
panding prosperity.  But  where  general  prosperity  persists, 
along  with  the  decline  of  stock  market  prices,  speculators 
tend  to  retire  very  slowly  from  the  market.  For  the  value 
of  most  stocks,  according  to  the  objective  tests  which  the 
speculator  applies,  should  increase  in  a  period  of  general 
prosperity;  and,  by  Wall  Street  conventions,  these  are  the 
only  criteria  of  value — particularly  were  they  emphasized 
in  1906.  The  power  of  investors  themselves  to  make  an 
effective  evaluation  and  to  manifest  it  by  extensive  pur- 
chases, vv^as  disregarded.  And,  as  in  1906,  this  is  the  usual 
course  of  Stock-Exchange  speculators.  It  is  assumed  that 
the  state  of  general  business  conditions  and  the  success,  with 
which  the  operations  of  the  corporations  represented  by 
particular  stocks  are  conducted,  determine  the  extent  to 
which  a  limitless  investment  fund  will  be  employed  in  ac- 
quiring those  particular   stocks.     The  individual   specula- 


Ill]  "  NEEDS  OF  THE  MARKET  "  m 

tor,  through  the  ready  possibility  of  selling  to  other  specu- 
lators if  he  wishes  to  do  so,  has  no  immediate  interest  in 
the  actual  existence  of  an  adequate  investing  class.  Ac- 
cordingly the  assumption  of  this  class'  existence  is  quite 
satisfying  to  speculators  generally. 

There  is  then  no  internal  agency  or  factor  existing  in 
the  New  York  stock  market  itself  to  prevent  extensive  over- 
speculation.  Nothing  whatever  tends  to  bring  the  volume 
of  speculation  in  different  stocks  into  approximate  con- 
formity with  investment  buying  or  selling.  The  individ- 
ual speculators  themselves  do  not  feel  the  pressing  import- 
ance of  rather  full  information  with  regard  to  the  volume 
and  rate  of  investment  absorption.  As  we  have  shown,  a 
speculative  class,  of  large  numbers  and  means  for  the  deposit 
of  an  enormous  aggregate  of  margins,  may  enter  into  ex- 
tensive ventures  on  the  Stock  Exchange,  and,  by  heavy 
speculative  buying,  raise  prices  sharply  to  very  high  levels ; 
in  fact,  this  process  will  not  cease  except  through  exhaus- 
tion of  the  speculators'  resources  for  further  margins.  And 
all  this  can  go  on  without  intelligent  reference  to  the  actual 
investment  demand.  Tn  1906.  indeed,  we  have  seen  that 
any  judgment  on  this  demand,  which  was  founded  on  an 
assumption  of  its  limitless  extent,  might  be  quite  erroneous 
and  yet  constitute  the  underlying  basis  of  speculative  ex- 
pectations and  actions  generally.  The  individual  brok- 
er's chief  interest — at  that  time,  as  always — lay  in  having 
the  buying  orders,  which  were  entrusted  to  him,  so  far  as 
possible,  of  a  speculative  character  and  as  little  as  possible 
consisting  of  odd-lot  investments.  The  banks  and  other 
agencies  which,  primarily  as  a  matter  of  their  own  conveni- 
ence, assisted  speculation  by  advances  in  the  shape  of  de- 
mand loans,  were  not  interested  in  the  adjustment  of  specu- 
lation and  investment  in  their  relative  volumes.  The  rules 
of  the  Stock  Exchange  and  the  customs  of  conducting  the 


112  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE  [112 

operations  subject  to  them  had  been  developed  in  the  pur- 
suit of  the  end,  or  "  ideal  ",  which,  Mr.  Meyer  writes,  "  is 
freedom  for  the  transfer  of  securities  in  the  most  simple 
and  convenient  manner,  with  the  least  possible  friction  and 
the  fewest  possible  restrictions  consistent  with  the  protec- 
tion of  the  rights  of  the  owners  and  dealers  in  securities." 
Simplicity  in  the  conduct  of  routine  transactions,  together 
with  inflexible  mechanical  honesty,  had  been  attained  to  a 
very  high  degree  by  those  associated  with  the  New  York- 
Stock  Exchange  in  1906,  especially  by  those  who  were 
chiefly  engaged  in  buying  and  selling.  However  much  had 
been  accomplished  in  the  efficiency  of  clerical  routine  and 
the  adherence  to  a  lofty  standard  of  business  integrity,  no 
provision  was  made  for  adjusting  the  volume  of  speculative 
commitments  to  that  of  investment  transactions  or  to  the 
character  of  the  latter.  And  if  no  action  by  the  authori- 
ties of  the  Exchange  had  been  taken  to  obtain  the  needed 
adjustment,  the  interests  of  the  brokers  or  bankers,  as  a 
whole  or  individually,  would  not  lead  them  to  enter  upon 
any  such  action.  Nor  was  the  automatic  operation  of  the 
prevailing  level  of  call  rates  effective  in  compelling  specu- 
lators to  give  attention,  in  spite  c^f  themselves,  to  the  in- 
vestment demand  or  to  the  relative  volume  of  their  own 
aggregate  commitments. 

To  the  fortuitous  advent  and  retirement  of  speculators, 
and  also  of  investors,  was  left  the  final  outcome  of  the 
general  course  of  the  market.  Investors'  operations  arose 
out  of  their  own  effective  desires  and  the  objective  quali- 
fications of  the  stocks  they  proposed  to  purchase.  Specu- 
lators had  in  mind  the  same  qualifications  and  acted  with- 
out proper  regard  for  the  extent  of  the  investment  demand 
— the  ''  needs  of  the  market  ",  which  President  Hadley  says 
speculation  must  "  anticipate  ",  in  order  to  be  accepted  as 
legitimate.     In  view  of  the  considerations  which  apparently 


113]  ''NEEDS  OF  THE  MARKET"  no 

moved  speculators  in  1906.  and  the  changes  in  the  extent 
and  character  of  the  investment  demand,  which  had  taken 
place  in  the  two  previous  years,  the  close  accordance  of 
speculation  and  investment  would  have  been  a  highly  im- 
probable event.  The  unknown  financial  capabilities  of  the 
speculative  class  alone  imposed  restrictions  on  the  extent 
to  which  its  operations  might  outrun  the  effective  invest- 
ors' demand.  Perhaps  they  will  constitute  the  only  check 
on  over-speculation  so  long  as  ''  capital's  freedom  of  move- 
ment "  on  the  Stock  Exchange,  as  that  is  understood  at 
present,  must  be  regarded  as  inviolable  against  interference 
of  any  sort. 

We  may  not  look  for  the  frequent  recurrence  of  specu- 
lation on  a  large  scale,  quite  out  of  proportion  to  the  pos- 
sibilities of  investment  absorption.  Only  at  the  end  of  such 
a  period  as  followed  the  Spanish  war  in  this  country,  would 
speculation  be  likely  to  be  conducted  on  a  scale  sufficient 
far  to  outdistance  investment  buying.  In  a  relatively  pro- 
longed period  of  general  economic  activity,  the  general  in- 
vestment fund  becomes  appreciably  contracted,  when  there 
is  a  heightened  demand  for  liquid  capital  to  finance  the  in- 
creased activity.  An  active  period  of  considerable  duration 
had  preceded  the  summer  of  1906.  The  financing  of  the 
Russo-Japanese  war,  after  its  conclusion,  the  San  Francisco 
fire's  effect  on  the  investing  capabilities  of  fire  insurance 
companies,  and  the  life  insurance  legislation  in  New  York 
State,  had  directly  and  definitely  acted  so  as  to  restrict  the 
total  investment  fund  which  could  be  devoted  to  purchases 
on  the  Stock  Exchange.  Since  the  emotions  of  speculators 
responded  most  readily  to  developments  which  would  doubt- 
less have  been  effective  in  attracting  an  unrestricted  invest- 
ing class,  if  the  latter  had  existed,  there  were  inevitable  out- 
breaks of  speculation  for  the  rise  in  1906  as  the  expansion 
of  prosperity  became  more  and  more  generally  obvious. 


1 14  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE  [  1 14 

It  was  to  the  immediate  interest  of  no  influential  class 
concerned  with  Stock  Exchange  activity  that  speculation's 
volume  should  conform  to  the  extent  of  investment  buy- 
ing. As  is  always  the  case  under  existing  conditions,  specu- 
lation could  go  beyond  investment  capacity  to  any  extent, 
with  no  curb  on  its  excessive  ''  anticipation  of  the  needs 
of  the  market  ",  except  the  eventual  exhaustion  of  its  de- 
votees' resources.  This  exhaustion  was  manifested  tempor- 
arily in  some  of  the  earlier  months  of  1906 — such  as  Febru- 
ary, April  and  June.  Finally  in  August  and  September, 
it  appeared  as  if  almost  every  potential  speculator  had  been 
lured  into  the  stock  market  and  had  ventured  all  of  his  re- 
sources that  were  available  for  speculation.  The  decline, 
which  sooner  or  later  was  inevitable  in  the  presence  of  the 
inadequate  investment  demand,  set  in.  Unlike  the  situ- 
ations in  the  preceding  March  or  May,  no  body  of  specula- 
tors reappeared  in  sufflcient  numbers  to  arrest  the  declines 
from  the  high  prices  of  September  and  to  bring  about  a 
renewed  rise  of  prices.  Speculation  for  another  expected 
rise  of  prices  could  only  avail  to  make  the  general  decline 
of  prices,  from  October  to  March  inclusive,  more  gradual 
than  it  might  have  been.  But  however  useful  operations 
of  this  nature  may  have  been,  from  the  standpoint  of  the 
common  interest,  the  individuals  who  participated  in  them 
incurred  a  large  aggregate  of  losses.  Individual  specula- 
tors for  the  rise  during  the  six  months'  decline  were,  of 
course,  not  interested  in  making  the  decline  gradual;  they 
desired  to  profit  by  the  expected  turn  in  the  general  course 
of  prices.  Had  the  insignificant  power  of  investment  buy- 
ing been  generally  apparent  to  speculators  by  the  middle 
of  1906,  they  probably  would  not  have  entered  the  stock 
market  to  the  extent  that  they  did  from  August  to  the  end 
of  the  year.  But  no  definite  information  regarding  the 
extent  of  investment  purchases  was  accorded  them;  and 


II^]  ''NEEDS  OF  THE  MARKET"  ne 

they  did  not  inquire  concerning  it.  When  they  proceeded 
to  act  on  the  assumption  of  the  unlimited  investment  de- 
mand and  to  go  far  beyond  the  actual  extent  of  that  de- 
mand, there  was  no  agency  in  the  New  York  financial 
markets,  as  they  were  organized  in  1906 — and  are  now  or- 
ganized for  that  matter — to  adjust  speculation  to  invest- 
ment; and  it  has  never  appeared  that  speculators,  despite 
the  high  degree  of  sagacity  attributed  to  them  by  tradition, 
had  the  power  in  1906,  or  at  any  other  time,  to  estimate 
the  strength  of  any  movement  in  the  market,  such  as  the 
rate  of  investment  absorption,  on  which  data  were  quite 
lacking.  The  fall  of  prices  which  followed  September,  1906, 
seemed  then  to  represent  the  liquidation  of  commitments 
for  the  rise  in  large  volume,  based  on  an  excessive  over- 
estimate of  the  investment  demand  or  ''  the  needs  of  the 
market  " — not  the  ''  discounting  "  of  a  comparatively  re- 
mote depression. 

Distinguishing  stock  speculation  from  speculation  in  com- 
modities subject  to  world-wide  demand.  Professor  Emery 
wrote  in  1896 : 

An  article  must  be  the  subject  of  a  general  world-wide  de- 
mand before  extensive  speculation  in  that  article  is  possible. 
A  more  limited  demand  may  allow  of  a  limited  amount  of 
speculative  trade,  but,  in  general,  speculation  will  arise  only 
where  the  commodity  is  one  of  the  staples  of  the  world 
market.  .  .  . 

.  .  .  Securities  .  .  .  offer  a  field  of  great  speculation  be- 
cause of  their  fluctuating  values.  They  differ  from  specula- 
tive commodities  in  that  they  are  of  a  fixed,  not  an  uncertain, 
supply.  Their  values,  however,  are  uncertain,  since  they  de- 
pend on  a  fluctuating  demand.  The  demand  itself  is  deter- 
mined by  the  market  estimate  of  earning  capacity. 

Allowing  the  possibility  of  a  "  limited  amount  of  specula- 


1 1 6  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE  [  1 16 

tive  trade  "  in  articles  subject  to  a  limited  demand,  implies 
that  stock  speculation  should  be  conducted  with  constant  re- 
gard to  the  urgency  of  the  investors'  demand  and  its  varia- 
tions from  time  to  time.  On  this  conformity  of  the  oper- 
ations of  speculators  w^ith  those  of  investors  the  whole  ques- 
tion of  the  legitimate  nature  of  stock  speculation  appears 
to  turn.  if  it  can  ever  be  shown  that  Stock-Exchange 
speculators  for  the  rise  have  consciously  adjusted  their  oper- 
ations to  the  manifested  power  of  investment  absorption, 
their  operations  may  fairly  be  said  to  have  been  legitimate 
at  that  time.  But  when  the  activity  of  speculation  has 
varied  with  no  attention  to  investors'  actions  except  such 
as  was  required  in  assuming  the  existence  of  a  class  of  in- 
vestors with  unlimited  resources,  speculation  would  conform 
to  investment  only  as  a  result  of  pure  chance.  The  con- 
sideration of  Stock-Exchange  events  in  1906  leads  to  the 
conclusion  that  the  advent  of  a  large  number  of  speculators 
in  1906  brought  about  a  sustained  activity  of  speculation, 
which  ran  far  beyond  the  ''  needs  of  the  market  ",  that  is 
the  effective  wants  of  investors.  And  it  further  appears 
that  speculation,  based  on  an  excessive  over-estimate  of  the 
'*  needs  of  the  market ",  was  not  restrained  by  the  in- 
dividual members  of  the  Stock  Exchange,  by  the  authori- 
ties of  that  institution,  or  by  any  other  agency  in  the  New 
York  financial  markets.  In  fact  the  only  action,  apparently, 
having  in  view  the  restraint  of  over-speculation  on  the 
Stock  Exchange,  was  taken  in  the  autumn  of  1906  by  cer- 
tain large  European  banks  which  raised  their  respective  dis- 
count rates  or  refused  to  discount  American  finance  bills 
any  further.  This  action  only  served  to  check  certain 
phases  of  speculative  activity,  and  was  applied  some  time 
after  speculators  had  effectively  over-estimated  the  invest- 
ment demand.  Accordingly  it  was  not  effective  in  check- 
ing incipient  over-speculation,  much  less  did  it  avail  to  pre- 


117]  " ^^^^^  ^^  ^^^  MARKET "  i^y 

vent  that  form  of  mischievous  activity.  So  long  as  specu- 
lators in  large  numbers,  partly  on  the  strength  of  the  un- 
warranted assumption  as  to  the  capacity  of  investment  ab- 
sorption, and  partly  in  the  expectation  of  selling  at  ad- 
vanced prices  to  other  speculators,  entered  into  commit- 
ments for  the  rise,  no  close  scrutiny  of  the  existing  invest- 
ment demand  was  made  by  them.  And,  moreover,  if  a 
large  class  existed,  having  the  inclination  and  the  resources 
to  venture  into  speculation,  no  restraint  on  their  activities 
was  ever  imposed  aside  from  the  wane  of  their  inclinations 
or  the  exhaustion  of  their  resources.  Possibly  we  shall  not 
soon  witness  such  a  concurrence  of  conditions  as  brought 
about  the  high  degree  of  speculative  activity  manifested  in 
1006  and  in  the  sixteen  months  which  preceded  that  year. 
If,  however,  those  conditions  ever  again  concur,  we  may 
look  for  a  period  of  over-speculation  on  the  Stock  Exchange 
which  will  only  be  checked  by  the  crippling  of  those  who 
engage  in  it.  This,  at  least,  seems  the  only  means  by  which 
over-speculation  can  be  brought  to  an  end,  so  long  as  the 
brokers'  interests  remain  the  same  as  in  1906,  and  the  Stock- 
Exchange  authorities  confine  the  exercise  of  their  extensive 
powers  to  maintaining  an  exalted  standard  of  mechanical 
honesty  in  the  dealings  of  its  members  with  each  other  and 
with  their  customers.  Utter  disregard  for  the  actual 
strength  of  the  *'  needs  of  the  market  ",  which  speculation 
supposedly  "  anticipates  ",  may  be  looked  upon  as  a  factor 
in  bringing  on  inevitable  disaster.  Just  how  costly  and 
wasteful  it  is  to  hope  for  the  checking  of  over-speculation 
by  the  financial  weakening  of  those  involved  in  it,  may  be  a 
question  which  cannot  be  discussed  very  fully  at  this  point ; 
but  in  the  next  chapter  we  shall  consider  some  possible  ef- 
fects of  over-speculation  on  such  a  large  scale  as  was  ap- 
parent in  1906. 


CHAPTER  VIII 

Stock  Speculation  in  1906  and  the  Succeeding 
Economic  Readjustment 

"  Je  mehr  Zwischenhande  an  einem  Produktions-  oder  Ab- 
satzprozesse  teilnehmen,  desto  weiter  muss  das  Ausbleiben  der 
schlieszlichen  Zahlung  seinen  storenden  Einfluss  ausdehnen, 
desto  mehr  namentlich  den  Konsumptionsmut  des  Publikums 
lahmen." — W.  Roscher,  Nationalokonomik  des  Gewerhfleiszes. 
8.  Auflage. 

A  decline  of  prices  on  the  Stock  Exchange  which  ac- 
companies or  precedes  a  general  financial  panic  and  com- 
mercial depression,  is  conventionally  ascribed  either  to  gen- 
eral ''  liquidation  of  the  businesses  of  the  country  " — which 
are  supposed  to  have  become  over-extended — or  to  specu- 
lative ''  discounting  "  of  the  depression.  Upholders  of 
either  view  consider  prices  of  stocks  either  merely  symp- 
tomatic of  existing  general  conditions  or  as  affording  baro- 
metric forecasts  of  future  conditions.  And  if  over-specu- 
lation on  the  Stock  Exchange  is  clearly  manifested  for  a 
considerable  time  before  the  panic  occurs,  it  is  said  offhand 
that  speculation  in  other  directions  was  also  overdone.  The 
aggregate  losses  incurred  in  Stock-Exchange  speculation, 
during  a  year  or  a  shorter  period,  are  not  regarded  in  the 
conventional  treatment  of  panics  and  their  connection  with 
speculation  of  that  sort.  Even  if  more  than  133,000,000 
shares  of  stock,  of  more  than  $11,100,000,000  total  value, 
are  sold  during  a  profound  and  steady  decline  over  a  rela- 
tively short  period  of  six  months,  the  losses  incurred  in  the 
118  [118 


11^]  STOCK  SPECULATION  IN  1906  ^g 

Speculation  involving  that  volume  of  operations  are  disre- 
garded in  discussing  the  conditions  which  gave  rise  to  the 
general  depression.  The  number  of  shares  sold  and  their 
total  value  as  given  above  were  both  exceeded  in  the  six 
months'  decline  on  the  Stock  Exchange,  which  ran  from 
October,  1906,  to  March,  1907,  inclusive.  We  have  already 
noticed  Professor  Huebner's  explanation  of  this  decline  as 
an  example  of  speculation's  "  discounting  "  the  coming  de- 
pression. We  may  now  give  attention  to  the  view  of  over- 
speculation  in  1906  and  1907  as  an  interesting  incident  but 
a  negligible  factor  in  the  violent  economic  readjustments 
of  1907  and  1908. 

It  is  maintained  that  the  thoroughgoing  liquidation  and 
tremendous  declines  at  the  end  of  1906  and  early  in  1907 
cannot  be  dismissed  as  important  factors  in  bringing  about 
the  disturbances  of  1907  and  1908.  Perhaps  if  only  10,- 
000,000  shares  had  been  sold  on  the  New  York  Stock  Ex- 
change in  the  six  months  of  falling  prices,  one  might  dis- 
regard the  losses  suffered  by  the  speculators  for  the  rise  who 
participated  in  those  sales.  But  the  volume  of  transac- 
tions which  accompanied  the  declines  on  the  Stock  Ex- 
change seems  to  make  the  liquidation  worthy  of  considera- 
tion as  a  factor  in  the  later  disturbances  of  a  more  gen- 
eral character. 

A  typical  **  proof  "  that  Stock-Exchange  speculation  in 
itself  had  no  part  in  bringing  on  the  panic  of  October,  1907, 
is  contained  in  Mr.  Meyer's  article  in  the  Yale  Review, 
which  has  already  been  cited.  This  article  is  to  be  con- 
sidered in  some  detail,  since  it  presents  a  widely  accepted 
view  of  stock  speculation's  place  in  the  readjustments  of 
1907.  In  itself  the  article  need  not  be  taken  seriously  any 
more  than  most  of  the  reflections  on  stock  speculation  that 
litter  economic  texts  and  periodicals.  However,  the  posi- 
tion of  the  writer  as  a  member  of  the  Governing  Committee 


I20  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE  [120 

of  the  Stock  Exchange,  the  respectability  of  the  periodical 
for  which  he  wrote,  and  the  approval  of  the  chairman  of  the 
Hughes  Committee  which  was  placed  on  Mr.  Meyer's 
''  proof  "/  have  led  us  to  turn  our  attention  to  this  article. 
In  connection  with  the  panic  of  October,  1907,  and  the 
events  which  led  up  to  it,  Mr.  Meyer  wrote : 

.  .  .  This  panic,  with  its  great  excitement  and  the  tre- 
mendous liquidation  which  marked  the  closing  months  of  1907 
on  the  Stock  Exchange,  w^hich  was  simply  a  manifestation  of 
the  contraction  and  liquidation  of  the  business  of  the  country, 
was  looked  upon  as  a  Wall  Street  ''  gamblers'  panic."  As  a 
matter  of  fact,  Wall  Street,  the  Stock  Exchange,  had  quietly 
liquidated  many  months  before.- 

Thus  asserting  that  "  the  Stock  Exchange  had  quietly 
liquidated  many  months  before  ",  Mr.  Meyer  dismisses  with 
a  wave  of  his  hand  the  possibility  that  over-speculation  in 
the  stock  market  could  have  had  any  influence  in  bringing 
on  the  panic  of  October,  1907,  or  the  succeeding  depression 
of  1908.  What  degree  of  belief  is  accorded  his  statement 
or  other  statements  to  the  same  effect  arises  from  the  widely 
accepted  fallacies  bound  up  with  the  theory  of  the  stock 
market's  "  discounting  "  faculty.  One  of  those  fallacies 
consists  in  regarding  prices  on  the  Stock  Exchange  as  mere 
barometric  forecasts  of  coming  events.  The  number  of 
speculators,  the  general  extent  of  the  resources  they  might 
have  devoted  to  speculation,  and  the  volume  of  their  trans- 
actions, are  not  considered.     Price  movements  in  such  a 

1  "  In  the  Yale  Review  for  May,  1909,  Mr.  Eugene  Meyer.  Jr.,  has 
shown  conclusively  that  speculation  on  the  stock  exchange  was  not  the 
chief  contributor  to  the  collapse  of  1907,  but  that  speculation  on  a 
much  wider  scale,  through  the  length  and  breadth  of  the  land,  was  the 
exciting  cause."  Horace  White,  "  The  Hughes  Investigation,"  Journal 
of  Political  Economy,  vol.  xvii,  p.  528,  note. 

2  Op.  cit.,  p.  45- 


I2i]  STOCK  SPECULATION  IN  1906  121 

month  as  June,  1904,  when  the  sale  of  4,972,804  shares 
was  recorded,  are  taken  to  have  just  as  much  importance  as 
in  January,  1906,  when  38,512,548  shares  were  sold.  Ac- 
cording to  the  '^  discounting  "  or  "  barometric  "  theory,  the 
two  bodies  of  speculators,  who  were  respectively  active  in 
both  months,  were  equally  intelligent  and  foreseeing,  and 
their  judgments,  expressed  in  the  quoted  prices,  were  just 
as  valuable  in  one  month  as  in  the  other.  Speculators  of  all 
classes,  and  at  all  times,  are  preternaturally  acute  and  fore- 
knowing, whether  they  are  present  in  such  numbers  as  to 
give  rise  to  average  transactions  each  day  of  100,000  or 
1,000,000  shares. 

And  moreover  it  appears  to  be  the  common  belief  that 
months  of  panic  and  depression  are  equally  significant, 
whether,  as  in  March,  1907,  32,208,525  shares  were  sold, 
or  17,333,793,  as  in  October  of  the  same  year.  Accord- 
ingly, if  early  in  1907  severe  declines  of  prices  occurred  in 
a  month  which  was  characterized  by  extensive  liquidation 
by  speculators,  liquidation  on  the  part  of  general  business 
was  predominant  during  other  months  later  in  the  year. 
Therefore,  the  usual  argument  runs,  with  more  or  less 
cogency,  general  business  in  1907  was  "  over-extended  ", 
concurrently  with  speculation  for  the  rise  on  the  Stock 
Exchange,  and  to  the  same  extent.  The  upholders  of  this 
view  quite  ignore  the  circumstance  that  the  profound  de- 
clines of  prices  in  March,  1907 — when  internal  liquidation 
of  the  stock  market  was  supposedly  in  progress — were  ac- 
companied by  a  volume  of  sales  in  excess  of  that 
which  went  along  with  the  declines  of  October,  taken  to 
represent  liquidation  by  general  business  interests,  by  86 
per  cent.  Mr.  Meyer,  however,  does  take  into  account  the 
records  of  sales  on  the  Stock  Exchange.  What  use  he 
makes  of  them  will  appear  from  the  following  passage : 

One  of  the  proofs  that  stock-exchange  expansion  and  con- 


122  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE  [122 

traction  had  run  their  course  before  the  panic  of  the  autumn, 
is  the  exhibit  of  transactions  on  the  Exchange  for  a  series  of 
years  preceding  the  breakdown.  The  following  table  gives  the 
number  of  shares  sold  on  the  New  York  Stock  Exchange  and 
their  total  value  from  the  years  1903  to  1907  inclusive,  to- 
gether with  increase  or  decrease  as  compared  with  the  pre- 
vious year : 

Transactions  Increase  or  Total  Value,  Increase  or 

in  shares,  Decrease,  Millions  Decrease. 

Millions.  %..  of  Dollars.  %, 

1903  161  11,000 

1904  187  +6.1                12,061  +   9.1 

1905  263  -\-  40.2               21,295  +  76.8 

1906  284  +8.0               2Z,Z93  +   9-9 

1907  196  —31.0                14,757  —36.8 

From  the  year  1903  to  the  year  1906,  the  total  number  of 
transactions  increased  from  161  to  284  million  shares,  a  gain 
of  76.4  per  cent.  The  total  value  represented  by  these  shares 
was,  in  1903,  11,000,  and  1906,  23,393  millions  of  dollars,  a 
gain  of  112.6  per  cent. 

From  1906  to  1907  a  great  contraction  took  place,  reducing 
total  transactions  from  284  to  196  millions,  equivalent  to  31 
per  cent.,  and  the  total  value  from  23,393  ^o  14,757  millions, 
equivalent  to  37  per  cent.,  approximately.  The  significant  fact 
is,,  however,  that  this  shrinkage  had  already  begun  early  in 
the  year  and  would  have  been  much  greater  but  for  the  num- 
ber of  shares  thrown  over  in  the  March  panic.  The  sales  in 
January  fell  from  38,500,000  shares  in  1906  to  22,700,000 
shares  in  1907,  and  in  February  from  21,700,000  to  16,500,000. 
Then  came  the  heavy  transactions  in  mid-March,  whicli  ad- 
vanced the  record  for  that  month  from  19,500,000  shares  in 
1906  to  32,200,000  shares  in  1907.  Even  with  this  phenomenal 
increase,  which  can  certainly  not  be  ascribed  to  speculation 
for  the  rise,  the  first  quarter  of  the  year  showed  a  decline  in 
dealings  from  79,900,000  shares  in  1906  to  71,400,000  shares 
in  1907.     The  second  quarter,  ending  June  30,  showed  a  de- 


123]  STOCK  SPECULATION  IN  1906  123 

cline  from  68,700,000  shares  in  1906  to  44,800,000  shares  in 
1907,  and  the  third  quarter  showed  approximately  the  same 
decHne  from  74,200,000  in  1906  to  40,600,000  shares  in  1907. 
Note  that  all  these  changes  took  place  before  the  trouble  in 
the  Mercantile  National  Bank,  which  led  to  the  general  panic. 
In  other  words,  Hquidation  had  been  effected  upon  a  large 
scale  in  the  Stock  Exchange  without  causing  serious  failures, 
and  the  market  may  be  said  to  have  been  at  a  level  even  below 
the  normal  and  indicating  no  sort  of  speculative  expansion. 
If  the  general  business  of  the  country  had  been  sound,  the 
stock  market  would  probably  have  remained  for  a  time  qui- 
escent and  begun  to  move  slowly  upward  under  the  beneficial 
effects  of  the  liquidation — as  in  1904.^ 

The  chief  point  advanced  in  the  first  part  of  the  passage 
quoted  is  that  stock  speculation,  as  measured  by  yearly  rec- 
ords of  Stock  Exchange  sales,  was  much  less  active  in  1907 
than  in  1908;  therefore  over-speculation  in  1907  could  have 
had  little  to  do  with  bringing  on  the  October  panic  of  the 
later  year.  But  the  differing  characters  of  the  U\o  years 
are  not  taken  into  account.  Over  against  1907,  with  its 
first  ten  months  given  over  to  well-nigh  unchecked  liquida- 
tion, is  set  1906,  during  w^hich  speculation  for  the  rise  at 
times  achieved  certain  degrees  of  temporary  success.  In 
the  same  way,  the  comparison  drawn  between  the  respective 
first  quarters  of  1906  and  1907,  with  regard  to  speculative 
activity,  is  quite  misleading.  In  1906,  January  was  char- 
acterized by  rising  prices  going  along  with  intense  specu- 
lative activity,  and  in  March  also  prices  rose  generally  al- 
though speculation  was  not  so  active  as  it  had  been  in  the 
first  month  of  the  year.  The  inten-ening  month  of  Febru- 
ary had  witnessed  a  sharp  general  fall  of  prices  following 
the  active  speculation  with  which  the  year  had  opened.  In 
the  first  three  months  of  1907,  however,  the  character  of  the 

3  Op.  cit.,  p.  36. 


124  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE  [124 

general  stock  market  movement  was  clearly  one  of  unre- 
strained liquidation.  Mr.  Meyer  is  quite  correct,  if  he 
means  to  imply  that  there  was  less  hopeful  speculation  for 
the  rise  early  in  1907  than  in  the  corresponding  period  of 
1906.  But  a  widespread  distribution  of  losses  incurred  by 
mistaken  speculation  on  the  long  side  prevailed  in  1907, 
as  against  the  sustained  fortunate  speculation  for  the  rise 
which  manifested  itself  in  January  and  March  of  1906. 
The  total  actual  values  of  the  shares  sold  on  the  Stock  Ex- 
change during  the  first  quarter  of  1906  amounted  to  $6,- 
756,000,000,  for  the  first  quarter  of  1907,  $5,706,000,000. 
Therefore,  following  the  line  of  Mr.  Meyer's  argument,  the 
total  activity  of  speculation  in  the  first  quarter  of  1906 
exceeded  that  of  1907.  But  the  sales  of  shares  possessing 
the  aggregate  value  of  $5,706,000,000  from  January  to 
March,  1907,  were  attended  by  severe  general  declines  of 
prices.  We  may  be  sure  that  most  speculators  for  the  rise 
— the  category  to  which  most  outside  traders  belong — lost 
heavily  during  these  three  months  as  a  result  of  their  ven- 
tures. That  is,  so  far  as  the  71,400,000  shares  sold  early 
in  1907  represented  speculation  for  the  rise — either  in  the 
purchases  or  in  the  liquidating  sales — it  was  almost  uni- 
formly unsuccessful.  This  could  not  be  said  of  speculation 
for  the  rise  in  the  79,700,000  shares  sold,  January  to  March, 
1906.  Generally  rising  prices  throughout  January  rewarded 
most  speculators  for  the  rise  who  ventured  into  the  mar-, 
ket  and  retired  in  that  month.  The  month  of  falling  prices 
and  of  liquidation,  February,  had  a  record  of  21,699,800 
shares  sold  on  the  Exchange — slightly  less  than  that  of 
January,  1907,  and  far  below  the  record  of  March,  1907. 

The  liquidation,  which  was  not  halted  from  January  to 
March,  1907,  continued  a  movement  which  had  set  in  during 
the  preceding  October — although  the  last  three  months  of 
1906  had  not  been  characterized  by  the  pronounced  and 


125]  STOCK  SPECULATION  IN  1906  j2r 

severe  fall  of  prices  which  marked  the  later  three  months 
named.  Not  only  from  January  to  March,  1907,  did  specu- 
lative commitments  for  the  rise  inflict  heavy  losses,  almost 
v^ithout  exception.  Losses  also  attended  this  class  of  oper- 
ations throughout  October  and  December,  1906 — and  to  a 
slighter  degree,  perhaps,  in  the  intervening  month  of 
November. 

We  may  fairly  assume  that  the  sales  of  stocks,  having  an 
aggregate  value  of  $5,706,000,000,  during  a  period  when 
the  prices  of  those  stocks  were  generally  declining,  would 
result  in  a  large  total  loss  if  speculation  for  the  rise  was  im- 
portant at  all  at  the  time.  A  violent  readjustment  and 
transfer  of  property  rights  would  follow  the  speculators' 
purchases  and  subsequent  forced  sales.  That  the  losses  in- 
cident to  the  liquidation  and  the  accompanying  decline  could 
be  so  insignificant  that  they  could  have  no  connection  with 
a  shortly  succeeding  financial  panic  and  general  economic 
depression,  seems  hardly  believable ;  and  it  does  not  appear 
that  Mr.  Meyer  has  established  the  impossibility  of  any  such 
connection. 

Nor  does  he  seem  to  be  any  more  successful  in  his  ef- 
forts to  show  that  "  over-extension  was  general  "  in  other 
lines  of  economic  endeavor  than  in  stock  speculation,  and 
that  declines  in  Stock  Exchange  prices  were  only  barometric 
indications  of  the  coming  depression.  He  attempts  to  do 
this  by  appealing  to  the  increased  number  of  building  per- 
mits in  New  York  and  other  cities,  and  also  of  mortgages 
recorded  in  Manhattan  and  the  Bronx,  in  the  years  preced- 
ing 1907.  Mere  volume  of  operations  or  transactions,  how- 
ever, does  not  necessarily  betray  over-speculation  in  any 
degree — much  less  is  it  an  index  of  over-speculation's  ex- 
tent. For  instance,  in  October  and  November,  1904,  very 
large  volumes  of  sales  on  the  New  York  Stock  Exchange 
were  recorded.     Prices  nevertheless  continued  to  rise;  not 


126  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE  [126 

for  months  did  the  obvious  signs  of  over-speculation  make 
their  appearance.  We  are  told  by  Mr.  Meyer  that  in  Greater 
New  York  during  1906  and  1907,  the  amounts  of  rec- 
orded mortgages  stood,  respectively,  at  v$723, 000,000  and 
$519,000,000,  and  that,  for  the  same  years,  the  building 
permits  amounted  to  $205,900,000  and  $175,500,000.  But 
these  statements  give  us  no  convincing  evidence  of  any  over- 
speculation  in  real  estate.  The  building  and  speculation 
may  have  been  conducted  in  response  to  an  adequate  de- 
mand, so  far  as  that  was  ascertainable  during  the  years  in 
question.  Our  information  concerning  the  force  of  final 
demand  and  the  extent  of  speculative  over-estimate  of  it 
on  the  Stock  Exchange  is  more  abundant  and  fuller.  Dur- 
ing 1906  it  was  evident  that  the  possible  extent  of  the  final 
absorption  of  securities  in  the  New  York  market  had  been 
narrowly  restricted  by  a  combination  of  conditions.  More- 
over it  was  seen  that  speculative  "  anticipation  "  had  re- 
peatedly displayed  a  tendency  to  go  far  beyond  the  revealed 
power  of  this  absorption,  even  before  August,  1906.  A 
general  entrance  of  speculators  into  the  stock  market  took 
place  in  that  month.  These  speculators  in  effect  undertook 
to  anticipate  an  assumed  urgent  and  extensive  investors' 
demand,  which  never  revealed  itself.  Throughout  the  de- 
cline of  prices  which  followed  September,  1906,  the  volumes 
of  transactions  in  stocks,  which  had  advanced  most  sharply 
in  price  during  the  summer,  maintained  records  of  trans- 
actions proportionate  to  the  total  volumes  of  sales  of  all 
shares  on  the  Stock  Exchange.  Accordingly  we  concluded 
that  investment  absorption  at  the  higher  price  levels  had 
failed  to  operate,  and  had  likewise  not  operated  to  the  ex- 
pected extent  through  the  protracted  declines  from  those 
levels. 

The  continued  recurrence  of  weekly  transactions  in  Union 
Pacific,  for  example,  aggregating  more  than  500,000  shares, 


127]  STOCK  SPECULATION  IN  1906  j27 

from  October  to  March  inclusive,  afforded  a  rough  indica- 
tion of  speculators'  over-estimate  of  investors'  wants.  And, 
resulting  from  the  action  of  speculators,  based  on  this  over- 
estimate, heavy  losses  were  suffered,  distributed  among  a 
large  body  of  speculators  on  a  small  scale.  There  has  never 
been  offered  any  evidence  of  real-estate  speculators'  going 
so  far  ahead  of  ultimate  demand  in  1906,  as  did  the  specu- 
lators on  the  New  York  Stock  Exchange. 

Certainly  there  are  no  inherent  tendencies  in  urban  real- 
estate  speculation,  as  it  is  conducted  at  present,  to  proceed 
unchecked  without  reference  to  the  character  of  the  final 
purchasers'  numbers  or  their  powers ;  this  tendency,  on  the 
part  of  Stock-Exchange  speculation,  has  already  been 
pointed  out.  Individual  borrowers  on  mortgage  must  in 
general  submit  to  an  examination  by  the  prospective  lenders 
or  mortgagees  as  to  the  nature  of  their  operations  and  in- 
tentions, and  their  abilities  also  must  undergo  some  scrutiny. 
The  possessors  of  funds  available  for  investment  in  mort- 
gages or  real-estate  loans  have  inducements  to  conduct  a 
preliminary  investigation.  Such  an  investigation  does  not 
appear  necessary  to  the  lender  of  funds  to  brokers  in  Wall 
Street,  that  are  readily  payable  on  demand,  as  to  the  ends 
which  are  sought  by  means  of  the  credit  he  is  asked  to  ex- 
tend. Nor  in  the  case  of  building  construction,  has  this 
sort  of  operation  a  tendency  to  proceed  without  any  regard 
to  the  existence  of  the  ultimate  purchasers  or  users.  The 
demand  by  investors  or  users  of  buildings  is,  in  its  extent 
and  urgency,  frequently  apparent  to  casual  observers,  and 
much  more  so  to  those  who  make  real-estate  dealings  their 
occupation. 

Stock  speculation  in  1906,  as  we  have  seen,  was  carried 
on  without  attention,  on  the  part  of  those  engaged  in  it,  to 
the  actual  conditions  of  the  investment  demand  or  to  the 
nature  of  its  manifestations.    Neither  the  brokers,  who  acted 


128  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE  [128 

as  agents  of  the  speculators,  nor  the  various  lenders  of  call 
money,  who  financed  stock  speculation,  were  interested  in 
checking  over-speculation.  And  there  were  no  mechanical 
checks,  such  as  the  rise  of  the  call  rates,  which  would  avail 
to  curb  over-speculation,  except  a  diminishing  flow  of  the 
speculators'  resources  into  fresh  commitments.  If  then  we 
desire  to  prove  the  comparative  insignificance  of  the  extent 
of  stock  speculation  in  1906  and  1907,  we  must  show  that 
speculators  in  those  two  years  lost  a  relatively  slight  aggre- 
gate as  compared  with  the  total  losses  incurred  in  speculative 
building  and  in  real-estate  operations. 

So  far  as  the  monthly  index  number  of  the  Economist 
threw  any  light  on  the  demand  for  commodities  generally, 
its  attainment  of  a  maximum  for  the  period  at  the  end  of 
May,  1907,  and  its  subsequent  decline  indicated  a  slackening 
of  that  demand  some  months  before  the  October  panic.  In 
fact  the  decline  of  the  index  number  after  the  end  of  May 
pointed  to  a  relaxed  demand  soon  after  the  completion  of 
the  Stock-Exchange  liquidation — that  is,  if  we  regard  that 
liquidation  as  having  run  its  course  by  the  spring  of  1907. 
The  lessened  demand  and  the  prospects  of  relaxed  economic 
activity  were  noticed  also  in  the  Economist — with  particular 
reference  to  this  country — as  early  as  x\pril  and  May."* 

Over-extension  of  world-wide  extent,  to  which  the  panic 
of  1907  and  subsequent  disturbances  are  vaguely  ascribed, 
means — if  it  means  anything — that  the  facilities  of  industry 
and  trade  had  generally  been  so  multiplied  as  to  furnish 
more  of  their  products  and  services  than  the  general  needs 
of  the  community  required  for  their  satisfaction.  But  in 
1906  and  early  in  1907  there  was  slight  indication  that  over- 
extensive  capitalization  had  gone  beyond  the  manifested 
general  demand.     Indeed  all  indications  pointed  to  the  diffi- 

^Economist,  April  27,  1907,  p.  730.     Ibid.,  May  11,  1907,  p.  823. 


129]  STOCK  SPECULATION  IN  1006  ^^o 

culties  of  satisfying  the  expanding  effective  demand  of  con- 
sumers and  of  those  who  availed  themselves  of  such  facili- 
ties as  the  agencies  of  trade  could  place  at  their  disposal. 
Putting  out  issues  of  bonds  in  large  amounts  had  become 
so  difficult  of  accomplishment  and  so  onerous  that  railroad 
and  industrial  corporations  had  well-nigh  desisted  from  at- 
tempts in  that  direction  long  before  the  end  of  1906.  Mills 
and  factories  were  working  over-time  in  the  efforts  to  fill 
the  heaped-up  orders  with  which  they  were  almost  over- 
whelmed. Railroads  w^ere  finding  their  chief  difficulty  in 
attempting  to  move  the  freight  with  which  their  lines  were 
congested.  The  railroads,  late  in  1906  and  early  in  1907, 
were  compelled  to  raise  fresh  supplies  of  capital  either  by 
means  of  large  issues  of  new  stock  or  by  floating  short-term 
notes  bearing  relatively  high  rates  of  interest.  Whether  we 
regard  the  stock  issues  in  question  as  ''  the  practical  assess- 
ment of  the  stockholders",  or  as  "water:  more  water", 
and  the  issues  of  notes  as  the  raising  of  funds  on  an  "  in- 
secure and  temporary  basis  "  ^  and  direct  our  criticism  to- 
ward these  expedients  accordingly,  it  is  difficult,  as  we  look 
back,  to  see  what  other  courses  lay  open  to  the  railroads. 
They  could  either  obtain  funds  by  the  means  they  adopted, 
or  else  continue  their  attempts  to  handle  the  enormous 
volume  of  traffic  offered  them  with  the  existing  inadequate 
facilities.  That  the  agencies  of  transportation  and  of  com- 
merce had  been  equipped  to  an  extent  beyond  that  required 
for  the  satisfaction  of  the  existing  urgent  demand,  there  was 
not  the  slightest  evidence  as  1906  drew  to  a  close.  The  in- 
dicated form  of  the  crisis  and  of  the  depression  was  rather 
that  of  under-consumption  than  of  over-capitalization  of  the 
equipment  for  production. 

Had  speculators  on  the  Stock  Exchange,  who  purchased 

^  A.  D.  Noyes,  Forty  Years  of  American  Finance,  p.  360. 


130  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE  [130 

Stocks  at  relatively  high  prices  in  September,  1906,  been 
operating  in  an  easy  world  money  market,  they  might  have 
maintained  the  high  level  of  prices  with  the  aid  of  foreign 
loans  until  investment  absorption,  proceeding  at  a  com- 
paratively slow  rate,  had  exerted  itself  to  its  full  extent. 
But  large  market  operators,  who  were  interested  in  main- 
taining prices,  could  not  obtain  the  funds  to  carry  out  their 
purposes,  either  in  this  country  or  abroad.  The  task  of 
maintaining  prices,  if  that  were  feasible,  was  left  to  the  body 
of  outside  speculators,  each  operating  on  a  small  scale,  and 
swayed  by  the  actual  extent  of  his  own  resources  and  by  his 
emotions,  and  each  working  for  his  own  individual  interests. 
This  unorganized  class  proved  to  be  quite  unable  to  prevent 
the  fall  of  prices,  which  lasted  from  October,  1906,  to 
March,  1907.  If  the  number  of  speculators  and  the  aggregate 
of  their  commitments  had  been  comparatively  insignificant. 
the  necessary  liquidation  in  the  stock  market  might  have 
been  accomplished  without  its  being  in  itself  an  occasion 
for  disturbance.  But  the  large  volume  of  speculative  ven- 
tures that  were  still  open  in  the  early  autumn  of  1906,  and 
the  number  of  them  which  appeared  to  have  been  made  dur- 
ing the  prolonged  decline,  meant  that  the  aggregate  losses  of 
unsuccessful  speculators  might  eventually  play  an  important 
part  in  determining  the  form  of  the  economic  readjustment 
which  would  be  necessary  in  the  near  future.  That  read- 
justment might  assume  the  form  of  a  financial  panic,  a  gen- 
eral depression  and  prostration  of  industry,  or  merely  an 
orderly,  thoroughgoing  liquidation  of  ventures  more  or 
less  speculative  in  character.  If  the  general  Stock-Ex- 
change decline,  which  set  in  early  in  the  autumn  of  1906, 
had  signified  speculative  liquidation,  it  remained  to  be  seen 
whether  the  losses  incidental  to  its  completion  and  to  the 
more  or  less  violent  readjustments  which  accompanied  it, 
would  be  sufficient  to  impinge  on  other  lines  of  economic 


131]  STOCK  SPECULATION  IN  1906  13 j 

activity.  Probably  liquidation  and  declining  prices,  with  a 
volume  of  transactions  such  as  was  recorded  in  1907,  from 
April  to  October,  would  not  have  had  sufficient  weight  to 
affect  general  business  on  the  side  of  demand.  But  specula- 
tion for  the  rise  of  the  volume  observed  in  August  and 
September,  1906,  which  ultimately  turned  out  to  be  unsuc- 
cessful since  it  was  undertaken  in  the  face  of  an  utterly  in- 
adequate investment  demand,  and  which  was  persistently 
carried  on  even  during  the  progress  of  the  decline — might 
conceivably  have  had  a  most  powerful  effect  on  general  con- 
ditions. It  makes  considerable  difference,  in  estimating  the 
aggregate  losses  incurred  during  a  decline  of  some  months' 
duration,  whether  50  or  100  millions  of  shares  were  sold 
while  the  decline  lasted.  If  the  lower  number  of  shares  were 
sold  in  the  course  of  a  prolonged  decline,  the  accompanying 
liquidation  might  be  an  almost  wholly  unmixed  benefit  to  the 
community,  attended  by  no  serious  consequences.  But  this 
would  not  mean  that  a  decline  in  which  more  than  twice 
that  number  of  shares  changed  hands  would  indicate  a 
wholly  desirable  and  beneficial  liquidation.  The  losses  in 
the  latter  event  might  be  of  such  aggregate  volume  as  to 
constitute  a  mighty  factor  in  affecting  the  extent  of  the 
general  consumers'  effective  demand.  In  current  discus- 
sion, the  course  of  prices  on  the  Stock  Exchange  is  regarded 
as  the  same  sort  of  barometric  index,  no  matter  whether 
the  transactions,  performed  while  the  prices  are  recorded, 
attain  a  volume  of  100,000,  500,00,  or  1,000,000  shares. 
But  if,  in  furnishing  an  index  of  approaching  conditions 
by  means  of  Stock-Exchange  prices,  a  very  large  number  of 
persons  are  supplying  the  power  for  the  recording  mech- 
anism, and  very  large  sums  are  devoted  to  that  purpose 
also,  the  general  good  or  ill  fortune  of  those  employed  in 
providing  this  barometric  service  may  play  an  important 
role  in  determining  the  future  conditions  which  the  specula- 
tors are  supposed  to  "discount." 


132  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE  [13J 

As  a  suggestion,  the  possibility  is  offered  that  the  losses 
sustained  by  unsuccessful  speculators  for  the  rise  in  the 
decline  of  six  months'  duration — October,  1906,  to  March, 
1907,  inclusive — on  the  Stock  Exchange,  involving  sales  of 
133,133,566  shares,  might  readily  amount  to  a  total  which 
would  seriously  aft'ect  the  character  and  strength  of  the  ef- 
fective consumers'  demand  for  commodities  generally.  The 
total  number  of  shares  sold,  which  has  just  been  given, 
might  be  compared  with  the  total  of  112,742,583  shares 
sold,  April  to  October,  1907,  inclusive;  during  the  latter 
seven  months,  we  are  told  by  Mr.  Meyer,  the  Stock  Ex- 
change was  engaged  in  liquidating  for  the  over-extended 
business  interests  of  the  country.  Even  if  we  felt  prepared 
to  accept  this  arbitrary  division  into  periods,  one  of  com- 
pleted internal  liquidation  by  stock  speculators  from  Octo- 
ber, 1906,  to  March,  1907,  and  the  other  one  of  liquidation 
by  the  Stock  Exchange  for  outside  interests,  from  April  to 
October,  1907 — we  should  feel  that  stock  speculation  had 
been  much  more  over-extended  in  the  autumn  of  1906  and 
in  the  first  few  months  of  1907,  than  general  business  had 
been  in  the  later  months  of  1907.  We  reach  this  conclusion 
by  noting  the  declines  in  prices  and  volumes  of  sales  in  the 
two  periods,  during  which  liquidation  for  stock  speculators 
and  for  general  business  interests,  respectively,  is  said  to 
have  taken  place.  Prices  on  the  Stock  Exchange  reached 
lower  levels  in  October  and  November,  1907,  than  those  to 
which  they  had  fallen  in  the  preceding  March.  But  the  ex- 
tent of  declines  of  prices  and  the  volumes  of  transactions, 
in  those  stocks  most  subject  to  speculation,  in  the  period  ex- 
tending from  October,  1906,  to  March,  1907,  far  exceeded, 
almost  without  exception,  the  declines  and  volumes  of  trans- 
actions in  the  same  stocks  during  the  seven  months,  April  to 
Octol^er,  1907,  inclusive.  If  then  the  li( [nidation  in  general 
business  was  severe  enough  to  account  in  part  for  the  panic 


133]  STOCK  SPECULATION  IN  1906  J33 

of  October  and  the  depression  of  1908,  it  seems  as  if  the 
Stock-Exchange  over-extension  and  liquidation  might  be 
considered  factors  of  importance.  If  we  are  to  estimate 
the  extent  of  over-extension  and  the  necessary  liquidation 
by  declines  of  prices  and  volumes  of  sales  on  the  Stock 
Exchange — and  it  does  not  appear  that  Mr.  Meyer  has  ap- 
plied any  more  rigorous  tests — we  should  conclude  that  in 
Stock- Exchange  speculation,  during  the  latter  part  of  1906. 
was  centered  a  degree  of  over-extension,  at  the  very  least, 
equal  to  that  apparent  in  general  business. 

Had  speculative  activity,  from  October  to  March — that 
is,  volumes  of  sales  in  various  speculative  stocks — shown  a 
progressive  diminution  as  the  liquidation  proceeded,  the 
losses  of  speculators  for  the  rise  might  have  been  regarded 
as  negligible  in  considering  the  developments  that  led  up  to 
the  later  panics  of  1907  and  the  general  depression  of  1908. 
If  investment  absorption  had  not  operated  to  the  expected 
extent  at  the  higher  price  levels,  it  might  have  appeared 
that  it  had  operated  when  prices  fell  somewhat  below  those 
levels,  in  the  event  that  speculative  activity  decreased  as  the 
decline  went  on.  The  extent  to  which  speculation  was  main- 
tained in  seven  of  the  more  prominent  speculative  stocks  is 
shown  in  the  tables  given  below.  In  the  seven  stocks  chosen 
— five  railroads  and  two  industrials  —  aggregate  transac- 
tions, amounting  to  65,294,365  shares,  constituted  54.8  per 
cent,  of  total  sales  on  the  Stock  Exchange  during  the  six 
months'  decline  of  1906  and  1907,  which  presumably  repre- 
sented Stock-Exchange  liquidation.  Except  in  the  cases  of 
Baltimore  &  Ohio  and  Southern  Pacific,  the  volume  of 
transactions  in  each  of  the  stocks  selected,  relatively  to  total 
transactions,  showed  little  diminution  in  the  later  months 
over  the  earlier  months  of  the  decline.  Not  only  did  in- 
vestment buying  fail  to  act  extensively  in  these  stocks,  so 
as  to  withdraw  them  from  the  speculative  market;  but  a 


134  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE  [134 

large  portion  of  each  issue  was  left  in  the  hands  of  specu- 
lators. Although  the  readiness  with  which  these  stocks 
could  be  sold  and  shifted  from  one  speculator  to  another 
lessened  the  probability  that  individual  operators  sustained 
heavy  losses,  the  large  number  of  these  stocks  sold  during 
the  profound  general  decline  would  inevitably  result  in 
heavy  losses  scattered  among  a  large  number  of  speculators. 
The  significance  of  the  volume  of  sales  and  fall  of  prices 
may  better  be  comprehended  by  taking  up  the  trading  activ- 
ity in  each  stock  of  the  seven  selected. 

Below  are  the  tables  to  which  we  have  referred : 

Note.  —  The  number  of  shares  of  Reading,  as  given  in  the  tables 
below,  is  one-half  that  given  in  the  records,  taken  from  the  Commer- 
cial and  Financial  Chronicle.  Dividing  by  2  the  published  volume  of 
transactions  seemed  best,  in  order  to  make  the  volumes  of  sales  in 
Reading,  the  stock  of  which  is  made  up  of  shares  having  par  values  of 
$50  each,  comparable  with  sales  in  the  other  six  stocks  entering  into 
these  tables,  each  of  which  is  made  up  of  shares  having  a  par  value  of 
$100.  One-half  the  published  volume  of  sales  in  Reading  is  likewise 
subtracted  from  the  total  volumes  of  sales  of  all  stocks  on  the  Ex- 
change, thus  making  those  totals  differ  from  the  totals  which  are  given 
in  the  Appendix. 

NUMBER  OF  SHARES  SOLD  MONTHLY,  AUGUST,   I906,  TO  MARCH,   I907,  INCLU- 
SIVE, OF  THE  FOLLOWING  STOCKS  ON  THE  NEW   YORK  STOCK  EXCHANGE. 

1906.  Atchison.  Bait.  &  O.      Reading.     So.  Pacific.  Union  Pac. 

August  ....  1,321,250  333,521  1,530,450  3,180,195  4,881,650 
September   . .      910,090        739,173        3,266,610        1,502,957        2,930,950 


October    . . . 

.      601,355 

248,405 

2,143,625 

932,870 

2,851,760 

November    . 

.      357,945 

109,040 

2,226,815 

669,440 

2,896,175 

December    . 

. .    670,660 

146.750 

2,558,140 

420,764 

2,643,600 

1907 

January    . . . 

.   1,058,700 

112,360 

2,285,237 

936,79s 

2,589.315 

February    . . 

.      501,480 

95,787 

1,955,808 

497,280 

2,055,370 

March     

•   1,386,945 

239,812 

2,917,545 

1,063,540 

4,203.735 

Totals   ....  4,577,085        952,154      14,087.170        4.520,689      17,239,955 
(Oct.,  1906-Mar.,  1907.) 


135]  STOCK  SPECULATION  IN  1906  13^ 

Total  Stocks  Total  All 

1906.                 Amal.  Cop.       U.  S.  Steel.            Selected.  Stocks. 

August    2,865,600            3»  1 36,598            17,177,264  30,274,566 

September    2,611,795            2,061,900            14,023,475  22,751,660 

October   2,091,275  2,772,060  11,641,350  19,750,505 

November 1,175,965  1,236,074  8,671,454  I7,i73,3i5 

December   1,437,450  1,300,220  9,177,584  17,898,912 

1907 

January   2,601,990  2,200,785  11,785,182  20,417,520 

February 1,205,182  1,227,628  7,538,535  14,515,164 

March    3,103,878  3,564,805  16,480,260  29,290,980 

Totals    11,615,740  12,301,572  65,294,365  119,046,396 

(Oct.,  1906-Mar.,  1907.) 

We  have  repeatedly  shown  that  the  good  or  ill  success  of 
a  speculative  movement  which  accompanies  a  rise  of  prices 
can  be  determined  by  the  evidence  of  investment  absorption 
at  the  topmost  prices  attained  as  the  result  of  speculative 
buying.  If,  after  the  highest  price  levels  have  been  at- 
tained, recorded  dealings  in  stocks  which  have  been  ad- 
vanced to  those  levels  display  only  insignificant  proportions, 
we  may  conclude,  provisionally  at  least,  that  investment  ab- 
sorption has  operated  to  the  extent  anticipated  by  specula- 
tors. As  illustrations,  we  may  consider  the  recorded 
volumes  of  transactions  and  the  price  movements,  from  July, 
1906,  to  March,  1907,  inclusive,  in  Atchison,  Baltimore  8: 
Ohio,  Reading,  Southern  Pacific,  Union  Pacific,  Amalga- 
mated Copper,  and  United  States  Steel  common,  respec- 
tively.    Atchison's  yearly  dividend  rate  was  increased  from 

4  to  5  per  cent,  in  October,  1906,  Baltimore  &  Ohio's  from 

5  to  6  per  cent.,  in  June.  Reading's  dividend  rate  of  4  per 
cent,  was  not  changed,  but  this  stock  is  representative  of  a 
class  of  securities,  including  among  others  Amalgamated 
Copper,  perennially  favored  by  speculators.  The  dividend 
increases  of  Southern  Pacific  and  of  Union  Pacific,  as  we 
have  seen,  gave  the  signal  for  the  outburst  of  intensely  ac- 


136  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE  [136 

tive  Speculation  in  August,  1906.  On  the  last  day  of  July, 
dividends  at  the  rate  of  2  per  cent,  on  Steel  common  were 
resumed.  On  none  of  these  stocks,  with  the  exception  of 
Amalgamated  Copper,  have  dividends  been  subsequently 
lowered  below  the  levels  of  1906,  and  on  some  of  them 
those  paid  at  that  time  have  been  increased. 

Atchison's  price,  after  reaching  a  maximum  of  iioj^  in 
September,  suffered  a  net  decline  from  that  point  to  89%, 
March  29.  1907,  amounting  to  20j4  points:  the  low  price 
in  March  was  82^4.  During  this  pronounced  decline,  ex- 
tending from  October,  1906,  to  March.  1907,  4.577,085 
shares  were  sold. 

Baltimore  &  Ohio's  price  in  September  reached  125^. 
During  the  six  following  months  of  liquidation  it  under- 
went a  net  decline  of  27^  points — to  97^,  March  29: 
905^  was  the  lowest  price  on  March  26th.  This  fall  of 
price  in  six  months  was  accompanied  by  the  sales  of  952,- 
154  shares. 

Reading's  price  declined  from  the  maximum  of  Septem- 
ber, 156%,  to  I04j^,  March  29:  in  the  panic  of  March 
14th  a  low  price  of  91  was  reached.  This  drop  of  52^4 
points  occurred,  during  the  course  of  sales  amounting  to 
14,087,170  shares.^ 

From  Southern  Pacific's  maximum  price  97^.  attained 
in  September,  there  was  a  net  decline  of  16%  points  to 
80^,  March  29.  A  low  price,  69%,  was  recorded  on 
March  14th.  In  the  six  months  of  falling  prices,  4,- 
520,689  shares  were  sold. 

The  six  months'  liquidation  in  Union  Pacific,  involving 
a  net  loss — from  i95>^,  the  maximum  price  of  September, 
to  134%,  March  29 — of  60^  points,  took  place  while  17,- 
239,955  shares  were  sold.  The  low  price  of  March  was 
120^. 

«  Actual  recorded  sales  of  shares,  having  a  par  value  of  $50  each, 
amounted  to  twice  this  number,  that  is  28,174,340  shares. 


l^y-j  STOCK  SPECULATION  IN  1906  j^? 

The  maximum  price  of  Amalgamated  Copper,  iiyy^,  was 
reached  in  October.  By  March  29th  the  price  had  fallen 
to  88%  —  a  decline  of  285^  points.  From  October  to 
March,  11,615,740  shares  were  sold. 

United  States  Steel  common's  maximum  price  of  October 
was  50><.  A  fall  of  14^^  points  to  355^  took  place  in  this 
stock's  price  up  to  March  29th,  along  with  sales  of  12,- 
301,572  shares. 

We  may  ask  whether  the  sales  of  17,239,958  shares  of 
Union  Pacific  and  the  60-point  decline  in  its  price,  would 
be  more  significant  in  the  widespread  losses  distributed 
among  speculators,  or  in  ''  discounting  "  a  depression  of 
relatively  short  duration  which  had  no  effect  on  the  divid- 
ends paid  holders  of  this  particular  stock.  In  connection 
with  "  discounting  "  future  events,  it  might  be  pointed  out 
that  Amalgamated  Copper  alone,  of  the  seven  stocks,  had 
its  dividends  reduced  as  a  result  of  the  depression  of  1908. 
The  percentages  of  declines  from  the  maximum  prices  in 
September  or  October  to  March  29th  were,  respectively, 
for  Atchison  19,  for  Baltimore  &  Ohio  22,  for  Reading  33, 
for  Southern  Pacific  17,  for  Union  Pacific  31,  for  Amalga 
mated  Copper  24,  and  for  United  States  Steel  common  29. 

In  the  case  of  Reading,  we  may  consider  whether  sales 
of  28,174,340  shares — amounting  to  the  equivalent  of  14  - 
087,170  '*  full  "  shares — during  a  period  of  six  months, 
while  the  price  fell  50 J/  points  or  33  per  cent.,  would  have 
brought  upon  speculators  an  insignificant  aggregate  of 
losses — an  aggregate  which  could  not  have  been  a  factor  in 
the  declining  urgency  of  the  general  consumers'  demand 
late  in  1907  and  in  1908. 

The  mechanism  of  Stock-Exchange  routine  and  brokers' 
clerical  facilities,  together  with  the  diligence  that  brokers 
displayed  in  pursuing  their  individual  interests,  had  been  so 
efficient  in  conducting  the  liquidation,   that  the  latter,  as 


138  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE  [138 

Mr.  Meyer  writes,  ''  had  been  effected  without  causing  seri- 
ous failures."  This  fact — the  general  absence  of  failures 
on  the  part  of  Stock-Exchange  members — testifies  merely  to 
the  sound  development  of  routine  procedure  in  the  conduct 
of  speculative  operations;  the  efficiency  of  brokers'  pro- 
cedure could  not  avail  to  prevent  declining  prices  and  heavy 
speculative  losses. 

Further  to  set  forth  the  inadequacy  of  investment  ab- 
sorption as  a  means  of  protecting  speculators  from  the 
losses  incident  to  the  prolonged  decline  from  October  to 
March,  the  following  table  has  been  drawn  up,  showing  the 
percentages  of  total  transactions  formed,  respectively,  by 
the  volumes  of  transactions  in  each  of  the  seven  stocks  that 
have  been  selected  for  our  particular  consideration : 

Aug.  1906-  Oct.  1906-  Jan.  1907-  Oct.  1906- 

Sept.  1906.  Dec.  1906.  Mar.  1907.  Mar.  1907. 

Atchison    4.2  3.0  4.6  3.9 

Baltimore  &   Ohio    2.0  0.9  0.7  0.8 

Reading    9.0  12.6  11. i  11.8 

South.  Pac 8.8  37  3-9  37 

Un.  Pac 147  15-3  i3-8  14.5 

Amal.  Cop 10.3  8.6  10.8  9-8 

U.  S.  Steel  9-8  97  10.9  10.3 

7  Stocks   58.8  53-8  55-8  54-8 

In  Baltimore  &  Ohio  and  in  Southern  Pacific,  the  volumes 
of  transactions  during  the  first  three  months  of  the  general 
decline,  October  to  December,  1906,  diminished  appreciably, 
as  compared  with  the  volumes  of  transactions  during  Au- 
gust and  September,  the  two  months  in  which  a  general  rise 
of  prices  took  place.  This  is  particularly  evident  when  ap- 
plied to  the  proportion  of  total  transactions  formed  by  the 
respective  volumes  of  transactions  in  those  two  stocks,  as 
shown  in  the  table  of  percentages.  A  slighter  diminution 
in  the  relative  speculative  activity  centred  in  Atchison  and 
Amalgamated  Copper  is  also  indicated  by  that  table  for  the 


139]  STOCK  SPECULATION  IN  1906  j^q 

last  three  months  of  1906.  But  in  Reading,  Union  Pacific 
and  United  States  Steel,  no  diminution  of  activity,  relative 
to  activity  of  trading  in  all  stocks,  is  noticeable;  in  fact, 
relative  activity  in  the  first  two  named  rather  increased.  So 
that,  although  this  table  indicates  the  possibility  that  invest- 
ment absorption  had  acted  in  Atchison,  Baltimore  &  Ohio, 
and  Southern  Pacific,  rather  more  than  it  had  in  all  stocks 
on  the  Exchange,  it  had  not  acted,  so  far  as  Reading  and 
Union  Pacific,  were  concerned,  in  the  direction  of  relieving 
speculators  of  the  burden  of  carrying  those  stocks  through 
those  months  of  pronounced  decline.  And  absorption  by 
outright  purchasers  or  by  strong  speculative  interests  did 
not  avail  to  relieve  speculators  of  their  involuntarily  as- 
sumed task  from  January  to  March,  1907.  in  the  cases  of 
Atchison,  Reading,  Union  Pacific,  Amalgamated  Copper, 
and  United  States  Steel — three  months  in  which  the  general 
decline  of  the  preceding  quarter  was  continued  with  in- 
creased force. 

The  task  of  carrying  the  more  prominent  speculative 
stocks  was  undertaken  and  distributed  among  a  multitude 
of  speculators,  on  w^hom  fell  an  aggregate  of  losses  which, 
it  is  maintained,  cannot  be  considered  negligible  as  a  factor 
in  the  general  disturbance  in  the  latter  part  of  1907.  At 
any  rate,  the  contention  that  the  total  losses  incurred  by 
speculators  for  the  rise  may  be  disregarded  appears  to 
involve  the  assumption  of  a  heavy  burden  of  proof.  Con- 
sider the  transactions  in  Union  Pacific  for  the  first  three 
months  of  1907  alone.  While,  in  this  quarter,  8,848420 
shares  were  sold,  the  price  fell  between  40  and  50  points, 
and  reached  a  price  on  March  14th  almost  60  points  below 
that  of  January  ist.  There  seems  no  ground  for  asserting 
that  the  losses  incident  to  transactions  in  this  particular 
stock  during  the  three  months  were  negligible.  When  the 
respective  volumes  of  commitments  for  the  rise  and  for 


140  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE  [  140 

the  decline,  together  with  the  amounts  of  sales  and  pur- 
chases by  investors,  are  still  unknown — as  they  always  have 
been — no  assertion  as  to  the  effect,  or  lack  of  effect,  pro- 
duced by  the  losses  of  speculators  in  Union  Pacific,  can  have 
any  sound  basis.  It  seems,  however,  much  more  conceiv- 
able that  the  speculators'  losses,  in  the  few  months  preced- 
ing April,  1907,  constituted  a  factor  of  considerable  import- 
ance in  determining  the  form  of  the  subsequent  general 
economic  readjustment.  And  in  connection  with  Reading 
also,  of  w^hich  the  equivalent  of  14,087,170  "  full  "  shares 
was  sold  while  a  six  months'  decline  took  place  amounting 
to  more  than  40  points,  the  same  observations  should  hold 
good. 

The  tables  show  incidentally  how  far  investment  absorp- 
tion fell  short  of  the  strength  anticipated  by  speculation 
from  August,  1906,  to  March,  1907.  But  with  that  matter 
we  are  not  immediately  concerned  at  this  point.  We  ob- 
tain from  the  tables  some  conception  of  the  volume  of 
liquidation  and  of  its  severity,  which  was  necessitated  by 
over-speculation  and  slight  absorption,  both  of  which  were 
manifested  in  the  latter  part  of  1906.  The  losses  brought 
upon  speculators  who  operated  during  the  prolonged  liquida- 
tion, if  they  are  ever  revealed  by  a  monumental  process  of 
accounting  research,  will  probably  be  thought  worthy  of 
consideration,  along  with  "  an  excessive  shortage  of  money 
which  .  .  .  v/as  because  of  extraordinary  business  '  booms  ' 
in  this  country.  Great  Britain  and  Germany,  as  well  as  ad- 
ventitious and  enormous  wastes  of  capital  such  as  had  been 
caused  by  the  San  Francisco  fire  and  the  Russo-Japanese 
War  ",  as  factors  **  which  intensiried  the  distressful  condi- 
tions in  October,  1907,"  '  and  which  served  to  bring  about 

7  Letter  of  J.  P.  Morgan  &  Co.,  Feby.  2.-,  rgi.^  to  the  Honorable  A. 
P.  Pujo.  Chairman  Committee  on  Banking  and  Currency.  House  of 
Representatives. 


141  ]  STOCK  SPECULATION  IN  1906  i^j 

in  part  the  diminished  consumers'  demand  that  was  a  fea- 
ture of  the  depression  in  1908.  Speculative  attempts  to 
anticipate  an  imaginary  investment  demand  for  stocks  ap- 
pear to  have  constituted  one  of  the  most  important  Hues 
of  economic  activity  during  1906  in  this  country.  It  was 
a  business  which  ran  steadily  at  a  loss  for  a  number  of 
months.  If  one  of  the  country's  most  important  divisions 
of  business  can  be  run  at  a  heavy  loss,  without  having  the 
loss  play  some  part  in  a  shortly  succeeding  financial  panic 
and  general  depression,  it  would  be  well  to  have  an  explana- 
tion of  its  absence  of  effect  on  general  conditions  that 
would  be  fuller  and  more  convincing  than  the  .explanation 
advanced  by  Mr.  Meyer.  This  explanation  has  been  ac- 
cepted by  most  of  those  who  believe  that  the  action  of  Stock - 
Exchange  prices  is  purely  symptomatic,  reflecting  general 
conditions,  or  that  the  "  discounting  "  faculty  is  possessed 
by  speculators  on  the  Stock  Exchange. 

If  conditions,  under  which  organized  stock  speculation 
is  carried  on,  permit  the  creation  of  speculative  commit- 
ments entirely  out  of  proportion  to  the  powers  of  final 
absorption,  it  might  be  well  to  know  how  far  over-specula- 
tion can  proceed  before  the  inevitable  losses  it  brings  on 
individual  traders  will  affect  general  economic  condi- 
tions. That  speculative  operations,  in  other  fields  than  that 
of  the  stock  market,  were  of  a  large  volume,  at  a  time  when 
over-speculation  existed  on  the  Stock  Exchange,  does  not 
prove  that  speculative  over-extension  also  existed  in  them 
to  the  same  extent.  And  that  over-speculation  on  a  much 
smaller  scale  than  that  revealed  in  1906  has  not  apparently 
affected  general  economic  conditions,  does  not  prove  that 
the  speculative  ''  anticipation  "  of  the  market's  imagin- 
ary needs  in  1906  had  no  part  in  bringing  on  the  panic  of 
October,  1907,  and  the  depression  of  1908. 

It  cannot  very  well  be  maintained  that  over-speculation 


142  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE  [14 


on  the  Stock  Exchange  was  the  ''  cause  "  of  the  panic  of 
October,  1907,  or  of  the  depression  which  followed.  But  if 
information  ever  becomes  available  concerning  the  extent 
of  speculative  losses  sustained  in  the  autumn  of  1906  and 
in  the  winter  and  early  spring  of  1907,  it  might  be  em- 
ployed in  a  serious  effort  to  ascertain  the  possibility  that 
those  losses  attained  a  volume  sufficient  to  bring  about  a 
pronounced  restriction  of  the  general  demand  for  the  pro- 
ducts of  industry  and  the  services  of  commerce — a  restric- 
tion which  was  the  most  striking  feature  of  the  depression 
of  1908.  Premonitions  of  a  lessened  demand  were  voiced 
as  early  as  x\pril,  1907,  in  an  English  financial  journal,  with 
reference  to  this  country.® 

We  may  obtain  convincing  evidence  at  some  future  time 
that  speculation  in  real  estate,  or  in  any  other  goods  which 
permit  that  form  of  activity,  had  been  carried  on  with  the 
same  blithe  disregard,  on  the  part  of  its  participants,  for  the 
ultimate  demand,  that  was  shown  by  Stock-Exchange  specu- 
lators in  1906,  and  on  an  equally  large  scale.  Then  we 
may  consider  all  speculators'  accumulated  losses  as  constitut- 
ing a  factor  in  bringing  on  the  general  depression  which 
set  in  shortly  after  the  completion  of  the  Stock-Exchange 
liquidation.  As  we  have  suggested,  evidence  on  these  points 
is  more  readily  available  with  regard  to  speculation  on  the 
Stock  Exchange  than  in  other  fields  of  activity.  But  the 
difficulty  of  financing  extensions  of  industrial  and  commer- 
cial facilities,  which  were  urgently  required  in  1906  by  an 
insistent  consumers'  demand,  rather  indicates  that  the  gen- 
eral business  of  the  country  had  not  gone  too  far  in  prepar- 
ing to  satisfy  the  existing  wants  of  consumers.  We  have 
no  evidence  that  any  other  class  of  traders  had  generally 
so  far  over-estimated  the  capacity  of  the  community  to  re- 

^  Economist,  April  27,  1907,  p.  730.     Ibid.,  May  11,  1907,  p.  823. 


143]  STOCK  SPECULATION  IN  1906  i^^ 

ward  its  services,  as  had  Stock-Exchange  speculators  in  the 
summer  and  early  autumn  of  1906.  Although  we  may  not 
be  able  to  establish  the  connection  between  over-speculation 
of  this  particular  sort  and  the  panic  of  October,  1907,  we 
may  look  for  some  future  investigator,  with  fuller  informa- 
tion at  his  command,  to  discover  some  degree  of  likelihood 
that  such  a  connection  existed. 


CHAPTER  IX 

Summary,  General  Conclusions,  and  Remedial 
Measures 

'■  Unfortunately  the  question  of  the  social  expediency  of 
dealing  in  futures  is  mixed  up  with  the  wider  question  of  the 
expediency  of  stock  and  commodity  speculation  as  it  is  now 
carried  on  in  the  financial  centres  of  the  country.  It  is  notor- 
ious that  this  speculation  is  not  confined  to  men  who  make  it 
a  business  and  are  trained  for  it  in  the  hard  school  of  experi- 
ence, but  that  it  is  also  indulged  in  intermittently  by  a  great 
army  of  men  and  women  whose  only  qualifications  are  a  taste 
for  gambling  and  the  consciousness  of  having  money  to  invest. 
.  .  .  How-to  confine  speculation  to  those  who  have  aptitude 
and  training  for  it  and  to  discourage  stock  and  commodity 
gambling  is  one  of  the  economic  problems  of  the  day." — Prof. 
H.  R.  Seager,  Introduction  to  Economics. 

The  events  which  attended  Stock-Exchange  speculation 
during  the  months  from  September,  1904,  to  March,  1907, 
have  now  been  considered.  The  attempt  has  also  been  made 
to  analyze  the  conditions  under  which  stock  speculation  in 
those  months  was  conducted.  Two  important  functions, 
conventionally  attributed  to  stock  exchanges,  were  men- 
tioned in  the  opening  chapter.  These  were,  first,  the  di- 
rection of  the  flow  of  the  investment  fund,  and,  second,  the 
"  discounting  "of  future  events  by  the  course  of  prices 
recorded  in  organized  trading  on  the  Exchange.  The  ex- 
tent to  which  operators  on  the  Stock  Exchange  and  the 
governing  authorities  of  that  institution  performed  those 
functions  has  already  been  noticed  at  some  length  and  with 
T44  [144 


145]  SUMMARY,  GENERAL  CONCLUSIONS  145 

some  repetition.  We  concluded  that  the  New  York  Stock 
Exchange,  acting  through  the  speculators  who  deal  in  ac- 
cordance with  its  rules  and  customs,  is  not  fitted  for  the 
performance  of  those  two  chief  functions  which  are  con- 
ventionally ascribed  to  organized  speculation  under  all  con- 
ditions. This  conclusion  was  derived  from  a  priori  con- 
siderations based  on  analysis  of  the  motives  which  im- 
pelled the  Stock-Exchange  authorities,  the  brokers  and  the 
individual  speculators.  Moreover,  our  study  of  specula- 
tive activity  in  1906  and  1907  has  not  led  us  to  admit  that 
speculators  in  those  years,  incidentally  to  the  pursuit  of 
their  individual  selfish  interests,  either  guided  the  flow  of 
capital  into  investment  or  "  discounted  "  the  October  panic 
of  1907  and  the  depression  of  1908. 

In  1906  particularly  and  the  preceding  few  years,  we 
concluded  that  the  New  York  Stock  Exchange,  as  an  in- 
stitution, and  its  individual  members  had  played  no  active 
part  in  *'  directing  the  flow  of  capital  "  into  investment. 
A  broad  market  was  provided  in  which  investors  could 
buy  or  sell,  according  to  their  several  desires.  But,  since 
the  attraction  of  investors  and  the  execution  of  their  or- 
ders offered  little  prospect  of  gain  to  the  brokers,  the  latter 
were  quite  passive  in  taking  orders  from  investors.  The 
brokers,  indeed,  rendered  honest  and  capable  services,  al- 
most without  exception,  to  those  investors  who  sought  them 
out.  So  inert,  however,  were  the  Stock  Exchange  and  its 
individual  members — that  is,  those  members  who  were  act- 
ing strictly  as  brokers — with  regard  to  investment  orders, 
that  they  could  not  be  said  to  have  played  any  part  what- 
soever in  ''  directing  "  the  disposal  of  the  investment  fund 
with  any  conscious  purpose  to  do  so.  Slight  attention, 
throughout  the  brief  period  we  considered,  was  paid  to  the 
strength  or  character  of  the  investment  demand — so  slight 
that  no  information  was  ever  sought  on  these  points,  much 


146  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE  [146 

less  obtained  or  published — by  those  connected  with  the 
Stock  Exchange.  The  conventional  assumption  that  there 
existed  a  numerous  class  of  investors,  having  unlimited 
funds  on  hand,  satisfied  the  speculators  and  also,  apparently, 
those  who  acted  as  their  brokers. 

We  have  considered  the  "  discounting  "  of  future  events 
by  speculators,  especially  the  ''  discounting  "  of  the  panic 
of  October,  1907,  and  the  subsequent  depression  by  the 
prolonged  general  decline  of  prices  which  set  in  after  Sep- 
tember, 1906.  "  Discounting  "  did  not  appear  to  furnish 
an  adequate  explanation  of  that  decline,  or  of  the  revealed 
tendency  of  speculative  activity  in  the  autumn  of  1906  and 
for  some  months  afterward.  Probably  the  unsatisfactory^ 
nature  of  the  "  discounting  "  theory  arises  chiefly  from  the 
lack  of  detailed  information  as  to  the  mechanism  through 
which  it  works.  For  example,  why  should  severe  falls  of 
price  have  occurred  in  stocks  whose  dividends  were  not 
lowered  during  the  depression  which  those  falls  of  price 
were  supposed  to  "  discount  "  ?  From  the  high  prices  of 
September,  1906,  Baltimore  &  Ohio,  Reading,  Union  Pacific, 
and  United  States  Steel  common  suffered  declines  by  the 
end  of  the  following  March,  which  ranged  from  22  to  33 
per  cent.  The  dividends  on  none  of  them  have  been  low- 
ered since  1906,  not  even  during  1908,  the  year  in  which 
the  depression  was  felt  most  keenly.  Amalgamated  Cop- 
per, on  the  other  hand,  declined  in  price  only  23.1  per  cent, 
from  its  high  price,  September,  1906,  to  March,  1907;  and 
yet  its  dividend  rate  was  reduced  shortly  afterward  by  75 
per  cent. — from  8  to  2  per  cent. — as  a  result  of  the  de- 
pression which  particularly  affected  the  copper  market.  The 
slight  degrees  of  dependence  shown  between  the  extent  of 
the  declines  in  individual  stocks  and  their  subsequent  value 
to  investors  make  us  loath  to  accept  the  "  discounting " 
faculty  as  an  attribute,  either  of  speculators  or  of  Stock-Ex- 


147]  SUMMARY,  GENERAL  CONCLUSIONS  i^y 

change  prices.  If,  in  1906  and  1907,  the  declines  in  separ- 
ate stocks  had  borne  some  quantitative  relation  to  subse- 
quent changes  in  dividends,  or  if  all  stocks  in  the  list  had 
fallen  in  price  to  nearly  the  same  extent — expressed  either 
absolutely  in  dollars  per  share  or  in  percentages — the  ''  dis- 
counting "  theory  might  deserve  a  serious  and  painstaking 
investigation  in  the  belief  that  it  might  be  verified  induc- 
tively. The  violent  rises  in  prices,  however,  from  the  end 
of  June  to  various  dates  in  September  would  tend  to  make 
us  skeptical  with  regard  to  the  superhuman  quality  of  specu- 
lative foreknowledge ;  for  what  event  which  occurred  in  Sep- 
tember did  all  these  advances  in  price  ''discount"?  Most 
certainly  they  did  not  forecast  general  investment  absorp- 
tion in  that  month  or  during  the  six  following  months.  Nor 
has  it  ever  been  shown  why  the  autumn  of  1906  should  have 
been  the  mystic  season  when  speculators  began  to  *'  dis- 
count "  a  panic  and  depression  more  than  a  year  in  the 
future.  These  considerations  led  us  to  seek  other  explana- 
tions of  the  general  decline  of  Stock-Exchange  prices,  from 
October,  1906,  to  March,  1907,  than  those  offered  by  the 
"  discounting  "  theory. 

It  has  been  shown  that  speculation  on  the  New  York 
Stock  Exchange  was  seriously  hampered  in  discharging  the 
two  functions  just  mentioned,  and  is  still  hampered  under 
the  conditions  that  persist  at  the  present  time.  In  the  first 
place,  the  Stock  Exchange,  as  such,  and  brokers  exercise 
little  control  over  the  volume  of  speculation  at  any  given 
time.  We  may  not  know  precisely  the  conditions  which 
gave  rise  to  prolonged  and  intense  activity  of  speculation 
on  the  part  of  the  **  public  ",  such  as  was  witnessed  during 
the  31  months'  period  we  undertook  to  study.  Few  of 
these  conditions,  however,  can  be  affected  by  the  Stock 
Exchange  or  by  its  members.  If  general  economic  condi- 
tions— or  even  broader  causes  —  lead  many  outsiders  to 


148  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE  [148 

Speculate  in  the  stock  market,  brokers  can  only  provide 
facilities  for  the  reception  of  these  outside  speculators. 
They  cannot  whip  up  speculation  during  a  dull  season,  and 
they  do  not  find  it  to  their  interest  to  restrain  it  when  it 
goes  too  far.  All  that  can  be  done  is  to  establish  connec- 
tions in  districts  where  speculators  are  to  be  found,  and 
to  treat  speculative  customers,  when  they  enter  the  market, 
in  such  a  way  as  to  encourage  them  in  their  activities. 
Brokers  and  others  connected  with  the  Stock  Exchange 
cannot  take  a  much  more  active  part  in  arousing  speculative 
activity  than  can  a  fisherman  who  uses  a  pound-net  in  at- 
tracting the  fish  he  desires  to  catch. 

It  has  already  been  said  that  brokers,  of  all  things,  are 
not  desirous  of  restraining  over-speculation,  for  reasons 
which  have  been  indicated  in  preceding  chapters  and  which 
will  be  further  set  forth.  If  outsiders,  desiring  to  engage 
in  speculation,  seek  to  indulge  their  inclinations  through  a 
broker,  the  latter  will  throw  no  obstacle  in  their  way.  Ex- 
cessive speculation  conceivably  might  go  so  far  as  to  shift 
a  large  proportion  of  existing  property  rights  in  the  com- 
munity from  one  set  of  owners  to  another,  and  carry  on  this 
shifting  to  any  extreme,  without  any  brokers'  action  inter- 
posing to  check  it.  When  any  number  of  persons,  no  mat- 
ter how  large,  wishes  to  enter  into  speculative  ventures, 
there  exists  no  force,  either  in  Stock  Exchange  procedure 
or  in  the  self-interest  of  brokers,  which  will  at  least  prevent 
their  making  the  initial  purchases  or  sales,  as  the  case  may 
be,  by  which  they  individually  commit  themselves  to  specu- 
lation on  one  side  of  the  market  or  the  other.  The  emo- 
tional state  of  the  outsider  who  undertakes  speculation,  and 
the  difficulty  of  comprehending  the  underlying  philosophy 
and  the  process  of  short  selling,  explain  in  part  perhaps  the 
proneness  of  such  a  speculator  as  the  outsider  to  commit 
himself  to  a  rise  of  prices  rather  than  to  a  fall.     In  periods 


149]  SUMMARY,  GENERAL  CONCLUSIONS  j^g 

of  great  speculative  activity,  accordingly,  aggregate  com- 
mitments on  the  long  side  far  outweigh  the  volume  of 
speculation  for  the  decline. 

The  ease  with  which  a  sale  or  a  purchase  can  be  made  in 
a  broad  market,  such  as  a  large  modern  stock  exchange  pro- 
vides, and  the  fact  that  Stock-Exchange  routine  conceals 
the  respective  identities  of  both  parties  from  each  other,  ac- 
count largely  for  the  disregard  shown  by  speculators  for 
the  actual  or  prospective  state  of  the  investment  demand. 
This  demand  determines  ultimately  the  *'  needs  of  the  mar- 
ket "  which  speculators  are  supposed  to  ''  anticipate."  The 
speculator  accordingly  does  not  know^  the  source  from 
which  he  buys  or  the  purchaser  to  w^hom  he  sells,  and  this 
ignorance  tends  to  make  him  disregard  general  investment 
buying  or  selling.  The  considerations  moving  the  specula- 
tor help  to  an  understanding  of  the  almost  unbelievable 
recklessness  of  the  speculators  in  1906.  As  at  other  times, 
they  did  not  trouble  themselves  to  inquire  into  investment 
operations,  or  else  they  rested  content  with  the  easy  be- 
lief in  the  existence  of  an  investing  class,  possessing  un- 
limited funds  in  the  aggregate,  but  varying  in  the  strength 
of  its  inclinations  to  buy  or  sell  on  the  Stock  Exchange. 
At  any  rate,  a  vague  reliance  on  that  belief  was  the  only 
form  of  attention  paid  by  speculators  to  the  investment  de- 
mand in  1906  and  1907. 

Moreover,  it  has  been  seen  that  the  brokers  individually 
were  interested  in  having  a  much  heavier  volume  of  specu- 
lative business  than  of  investment  orders,  since  the  former 
was  far  and  away  the  more  profitable.  Every  facility  which 
the  broker  was  permitted  to  provide  for  the  enlargement  of 
his  business  was  applied  to  inciting  speculation.  Orders 
for  investment  purchases  were  received  without  enthusiasm 
by  most  brokers.  The  wideflung  connections  with  other 
cities  and  towns,  and  the  extensive  system  of  branch  offices 


I-O  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE  [150 

had  the  purpose  of  making  speculation  convenient  and  easy 
for  those  outsiders  who  were  brought  into  touch  with  the 
New  York  stock  market  by  these  means.  Accordingly  the 
advent  of  a  large  body  of  speculators,  creating  a  volume  of 
commitments  out  of  all  proportion  to  the  possibilities  of  the 
investment  demand,  met  with  no  restraint  on  the  part  of 
the  brokers — nor  on  the  part  of  the  Stock  Exchange  acting 
through  its  governing  authority. 

It  was  pointed  out  that  the  relative  profitableness  of  specu- 
lative and  investment  orders  to  brokers  rested  on  the  pre- 
vailing rate  of  commission  charged  by  them.  This  rate 
depended  on  the  number  of  shares  involved  in  a  given  trans- 
action, and  was  charged  uniformly  either  on  a  purchase  or 
on  a  sale  made  on  the  Stock  Exchange.  It  did  not  make 
any  difference  in  general,  where  the  shares  were  sold  or 
purchased  in  hundred-share  lots  or  multiples  thereof, 
whether  the  shares  purchased  were  afterward  carried  on 
margin  or  transferred  to  the  buyer.  But  the  differing  char- 
acter of  the  orders  executed  meant  widely  varying  degrees 
of  trouble  and  expense  to  the  broker.  One-eighth  of  one 
per  cent,  of  the  par  value  of  the  stock,  the  minimum  rate 
of  commission  prescribed  by  the  rules  of  the  Stock  Ex- 
change, was  the  prevailing  rate,  almost  without  exception. 
In  the  case  of  small  odd  lots  of  stock  bought  and  trans- 
ferred for  investors,  it  is  highly  doubtful  whether  the 
commission  exacted  covered  the  expense  which  the  com- 
plete series  of  transactions  brought  upon  the  broker  who 
performed  them. 

The  authorities  of  the  Stock  Exchange  did  not  exert  the 
despotic  power  which  they  have  over  the  activities  of  the 
individual  members,  in  seeking  to  adjust  the  volume  of 
speculative  operations  to  the  strength  of  the  effective  in- 
vestors' demand.  Apparently  those  authorities  were  and 
are  guided  by  the  idea  that  the  play  of   self-interest  of 


I^l]  SUMMARY,  GENERAL  CONCLUSIONS  151 

Speculators,  brokers  and  investors  will  serve  to  bring  about 
the  desirable  adjustment.  The  powers  of  the  Governing 
Committee  were  invoked  chiefly  to  maintain  a  high  standard 
of  honesty  in  the  dealings  of  members  among  themselves 
and  with  their  customers.  It  seems  to  have  been  the  pre- 
valent conception  of  ''  capital's  freedom  of  movement  "  that 
those  having  control  of  capital  at  any  given  time  should  be 
allowed  to  dissipate  it  in  over-speculation  at  their  pleasure. 
Restraint  of  any  widespread  tendency  toward  over-specula- 
tion would  not  only  interfere  with  ''  capital's  freedom  of 
movement  ",  but  would  also  tend  to  restrict  in  volume  the 
most  profitable  portion  of  the  individual  Stock-Exchange 
member's  operations  as  a  broker.  Since  adherence  to  the 
laissez-faire  policy,  with  regard  to  restraint  of  over-specu- 
lation, appeared  most  advantageous  to  the  brokers'  interests, 
no  action  was  taken  by  the  Stock  Exchange  to  bring  specu- 
lation into  conformity  with  investment.  The  Stock-Ex- 
change authorities,  in  1906  and  ever  since,  have  been  dili- 
gent in  seeking  to  attain  the  ''  ideal  "  of  their  institution, 
to  which  we  have  already  referred,  as  it  has  been  formu- 
lated by  Mr.  Meyer.  It  consists  of  ''freedom  for  the  transfer 
of  securities  in  the  most  simple  and  convenient  manner, 
with  the  least  possible  friction  and  the  fewest  possible  re- 
strictions consistent  with  the  protection  of  the  rights  of  the 
owners  and  dealers  in  securities."  It  was  pointed  out,  when 
this  ''  ideal  "  was  previously  cited,  that  its  fullest  attain- 
ment would  not  necessarily  lead  to  any  adjustment  of  oper- 
ations, on  the  part  of  speculators,  to  the  "  needs  of  the  mar- 
ket " — that  is,  to  the  effective  investment  demand.  Cer- 
tainly in  1906  and  1907,  there  was  no  relaxation  in  the 
pursuit  of  this  ''  ideal  ".  and  yet  there  was  abundant  evi- 
dence that  all  the  energy  expended  in  that  pursuit  had  not 
aided  in  restraining  over-speculation. 

Another  direction  in  which  the  powers  of  the  Stock  Ex- 


152  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE  [152 

change  were  exercised  was  in  that  of  enforcing  the  pre- 
scribed minimum  rates  of  commission,  and  in  seeing  that  no 
rebate  or  deduction  was  made  from  the  commission  apply- 
ing to  any  particular  transaction.  Punishment  for  depart- 
ures from  the  ordained  rates  of  commission  was  inflicted 
inexorably  and  heavily.  But  the  enforcement  of  the  pre- 
scribed minimum  rates  of  commission,  to  which  so  much 
effort  was  devoted,  would  not  do  much  tow^ard  adjusting 
the  volume  of  speculation  to  that  of  investment. 

Any  tendency  then  that  speculation  for  the  rise  might 
have  shown  in  1906  to  go  far  beyond  the  requirements  of 
the  investment  demand  would  encounter  no  check  from 
the  authorities  of  the  Stock  Exchange.  They  devoted 
themselves  to  the  pursuit  of  ends  quite  removed  from  those 
of  curbing  over-speculation.  It  may  appear  a  digression 
to  have  treated  at  such  length  the  purposes  which  the  Stock- 
Exchange  authorities  have  had  exclusively  in  view.  They 
have  been  considered,  however,  because  any  criticism  of 
Stock-Exchange  procedure  is  met  frequently  by  its  de- 
fenders' pointing  to  the  diligence  which  has  been  shown  in 
simplifying  the  routine  and  enforcing  a  high  standard  of 
integrity  among  those  who  follow  that  routine.  The  sim- 
plifying of  routine  and  mechanical  honesty  have  not  proved 
to  be  very  effective  in  the  restraint  of  over-speculation. 

As  was  said  in  a  preceding  chapter,  those  whose  interest 
in  the  speculative  field  lies  in  regarding  it  as  a  province  of 
the  money  market  in  which  funds  temporarily  in  hand  can 
be  lent  on  demand,  are  not  concerned  with  the  restraint  of 
over-speculation.  The  machinery  for  lending  on  call  has  been 
so  perfected  that  a  high  degree  of  over-speculation  does 
not  threaten  those  who  lend  to  speculators'  brokers  with 
losses  through  the  default  of  the  borrowers.  And  the  ease 
with  which  one  speculator  can  trade  with  another  and  the 
ignorance  of  either  party  to  a  sale  on  the  Stock  Exchange 


153]  SUMMARY,  GENERAL  CONCLUSIONS  153 

of  the  other's  identity — not  to  speak  of  the  other's  pur- 
poses— have  tended  to  make  individual  speculators  care- 
less of  the  urgency  and  character  of  the  investment  demand. 

Public  opinion,  when  it  does  not  consider  speculation — 
of  any  volume  and  bearing  any  proportion  at  all  to  the  in- 
vestment demand — as  discharging  some  vaguely  useful  so- 
cial function,  so  long  as  its  routine  is  conducted  honestly, 
looks  upon  it  as  a  means  of  parting  fools  from  their  money 
with  least  inconvenience  to  anybody  else.  Aggregate  losses 
in  the  stock  market  are  regarded  by  the  average  man  as 
negligible.  If  "  the  stupid  money  of  stupid  people  "  is  lost 
in  the  performance  of  socially  useful  functions  by  specula- 
tors, the  value  of  the  service  appears  to  be  well  worth  the 
cost.  No  attention  is  given  to  a  system  of  organized  specu- 
lation that  conceivably  may  heap  an  aggregate  of  losses  upon 
those  who  engage  in  it,  necessitating  a  general  economic 
readjustment  throughout  the  whole  community.  Specula- 
tive prices,  in  the  public  mind,  are  vaguely  symptomatic  of 
general  economic  conditions,  either  existing  or  soon  to  exist 
The  operations  of  speculation  also  are  thought  to  be  mere 
incidents  in  the  general  economic  life.  These  operations 
are  not  supposed,  according  to  tradition,  to  constitute  a 
volume  of  transactions  that  may  forni  an  important  factor 
in  determining  conditions,  according  as  their  general  suc- 
cess is  good  or  ill. 

Public  attention,  as  expressed  in  legislative  acts,  is  usu- 
ally concentrated  upon  phases  of  speculation  which  distin- 
guish its  conduct  from  that  of  other  business.  The  re-hypo- 
thecation of  securities  particularly  excites  the  suspicion  of 
the  business  man  or  lawyer  whose  comprehension  of  Stock- 
Exchange  practice  is  rather  hazy.  Perennial  efforts  are 
put  forth  to  make  this  practice  accord  with  the  usages  of 
ordinary  business.  ^lanipulation  also  has  drawn  the  un- 
favorable notice  of   political   speakers  and  of   legislators. 


154  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE  [134 

Objections  to  this  abuse  seem  to  rest  partly  on  the  medieval 
predication  of  a  "  just  price  "  for  every  economic  com- 
modity and  service,  and  partly  on  the  conception  of  specu- 
lation as  a  game  of  chance  which  should  be  played  fairly. 
The  manipulator,  accordingly,  is  viewed  in  much  the  same 
light  as  is  the  gambler  who  uses  a  roulette  wheel  with  an 
electro-magnetic  attachment  or  who  plays  with  marked 
cards. 

Those  manifestations  of  speculative  activity  which  are 
obvious  and  picturesque,  or  else  which  difrer  most  strik- 
ingly from  those  observed  in  ordinary  business,  draw  most 
attention.  It  appears  to  be  taken  for  granted  that  specu- 
lators should  carry  on  their  operations  in  utter  ignorance 
of  the  investment  demand.  Every  other  attempt  to  "  anti- 
cipate the  needs  of  the  market  ",  on  the  part  of  industry 
and  commerce,  is  made  with  the  fullest  knowledge  of  the 
market  and  its  needs  that  can  be  obtained.  That  specula- 
tors should  be  quite  without  knowledge  of  their  ultimate 
market  and  that  all  their  operations  should  be  shrouded 
in  secrecy,  is  commonly  accepted.  Possibly  this  is  because 
of  the  general  vague  idea,  to  which  reference  was  just  made, 
that  after  all  speculation  is  a  game  of  chance.  In  such  a 
game  too  much  foreknowledge  of  the  probabilities  of  suc- 
cess would  be  undesirable,  from  the  sportsman's  viewpoint. 

Thus  it  has  come  about  that  no  effort  has  been  made  by 
legislators,  by  the  authorities  of  the  Stock  Exchange,  by 
bankers  connected  with  Stock-Exchange  activities,  or  by 
members  acting  in  concert,  to  make  the  volume  of  specula- 
tive transactions  conform  to  the  investment  demand,  even 
so  far  as  the  latter  could  be  estimated  approximately.  Ad- 
justing the  volume  of  speculation  to  the  extent  of  the  in- 
vestment demand  would  tend  to  interfere  with  "  capital's 
freedom  of  movement  " — as  that  is  conceived.  This  ad- 
justment would  also  be  prejudicial  to  the  immediate  inter- 


155]  SUMMARY,  GENERAL  CONCLUSIONS  155 

ests  of  brokers,  as  those  interests  are  understood  at  present. 
Moreover  the  tendency  of  speculation  to  exceed  investment 
in  volume  of  operations  is  either  accepted  as  a  platitude  or 
else  to  speculation  is  ascribed  the  faculty  of  adjusting  its 
transactions  to  those  of  investors,  merely  by  virtue  of  the 
superhuman  sagacity  commonly  attributed  to  those  who  en- 
gage in  it. 

It  seems  difficult  to  accept  the  tendency  of  speculation  to 
go  beyond  the  "  needs  of  the  market  "  as  inevitable.  At 
least  we  cannot  content  ourselves  with  the  belief  that  it  is 
inevitable.  And  the  activities  of  speculators  in  the  period 
we  have  considered  do  not  lead  us  to  believe  that  speculators 
always  have  the  inherent  power  of  adjusting  the  volume  of 
their  operations  to  the  demands  of  investors.  So  long  as 
speculative  purchases  are  made  in  the  face  of  an  inadequate 
investment  demand,  speculators  for  the  rise  can  hope  to  gain 
by  selling,  most  probably,  to  other  speculators.  If  the  rate 
and  volume  of  investment  absorption  is  quite  generally  un- 
known, the  process  of  speculators'  selling  at  a  profit  to  other 
speculators  will  end  when  no  more  speculators  come  for- 
ward to  buy.  W^hen  that  point  will  be  reached  no  specula- 
tor in  a  broad  market  can  foretell.  With  no  knowledge 
either  of  the  investment  demand  or  of  the  available  specu- 
lative resources,  speculators  on  the  Stock  Exchange  con- 
duct their  operations  in  the  greatest  uncertainty.  Never- 
theless if  speculators  for  the  rise  were  in  general  prepared 
to  abide  by  their  commitments  when  the  market,  for  a  time, 
goes  contrary  to  their  expectations,  they  could,  not  perhaps 
be  regarded  as  merely  gambling  on  the  state  of  the  un- 
known investment  demand  or  on  the  uncertain  continuation 
of  speculative  buying.  But.  even  when  they  do  not  place 
definite  ''  stop-loss  "  orders  with  their  brokers  to  limit  the 
extent  of  their  possible  losses,  most  outside  speculators 
either  have  only  limited  amounts  to  lose  in  the  market, 


156  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE  [136 

or  else  they  do  not  desire  to  lose  more  than  certain  sums, 
varying  with  the  individuals.  The  usual  venture  for  the 
rise  made  by  an  outside  speculator  takes  the  form  of  wager- 
ing that  investment  absorption,  speculative  buying,  or  both 
together,  w^ill  raise  prices  to  a  point  where  he  can  obtain  a 
satisfactory  profit  before  either  investment  or  speculative 
buying  will  be  exhausted  so  that  prices  will  fall  to  a  point 
where  he  must  sell  in  order  to  confine  his  loss  to  the  amount 
which  he  can  afford,  or  is  willing,  to  lose.  The  amount  of 
the  loss  he  can  sustain  may  be  well  determined  in  the  specu- 
lator's mind  at  the  time  he  enters  the  market.  But  the  ex- 
tent of  the  investment  demand  and  the  duration  of  specula- 
tive purchasing  are  so  enshrouded  in  mystery  for  him  that 
his  venture  is  little  more  than  a  gambling  transaction.  And 
the  raising  of  prices  to  relatively  high  levels,  as  a  result  of 
speculative  purchases  in  heavy  volume — such  as  was  wit- 
nessed in  the  summer  of  1906 — where  investment  absorp- 
tion fails  to  exert  itself,  and  the  decline  of  prices  after- 
ward, accompanied  by  an  insignificant  volume  of  invest- 
ment buying,  appear  to  constitute  a  service  of  doubtful  util- 
ity to  investors  or  to  the  community.  It  seems,  therefore, 
as  if  it  might  be  w^orth  while  to  curb  any  system  of  specula- 
tion in  which  separate  transactions  are  carried  out  on  a 
basis  little  different  from  that  of  gambling,  and  which  ap- 
pears to  render  no  useful  economic  or  social  service.  In- 
deed, over-speculation  and  the  resulting  liquidation,  it  has 
been  seen,  might  conceivably  go  to  the  extreme  of  con- 
stituting a  powerful  factor  in  a  violent  economic  readjust- 
ment and  depression.  We  shall  therefore  consider  in  con- 
clusion certain  measures  which  might  possibly  assist  in 
changing  conditions  so  little  conducive  to  the  general  well- 
being. 


I-j]  SUMMARY,  GENERAL  CONCLUSIONS  157 

Remedial  Measures 

Repeated  reference  has  been  made  to  the  prevaihng  rate 
of  commission  charged  by  New  York  Stock-Exchange  mem- 
bers, and  the  part  it  plays  in  leading  the  brokers  to  promote 
speculation,  so  far  as  they  are  able,  rather  than  investment 
in  stocks  listed  on  the  Exchange.  \\t  are  concerned  with 
measures  that  may  tend  to  bring  about  the  adjustment  of 
speculation  to  investment  demand.  We  shall  therefore  con- 
sider possible  changes  in  the  commission  rate  which  would 
presumably  make  investment  purchases,  on  the  part  of  their 
principals,  more  desirable  to  brokers,  as  compared  with 
transactions  performed  for  speculators,  than  they  are  un- 
der the  present  rules. 

As  we  have  seen,  the  brokers'  interest  in.  encouraging 
speculation  rather  than  investment  buying,  in  such  a  year 
as  1906,  by  every  permissible  means,  rests  on  the  rate  of 
commission  which  has  prevailed  for  many  years  on  the  New 
York  Stock  Exchange.  With  this  fact  standing  out  as  it 
does,  it  is  puzzling  to  account  for  the  passage  in  the  report 
of  the  sub-committee  of  the  House  Committee  on  Banking 
and  Currency,  popularly  known  as  the  "  Money  Trust  " 
committee,  which  recommends  specifically  that  commission 
rates  on  the  stock  exchanges  be  left  unchanged.^  Perhaps 
this  can  be  explained  by  the  usual  action  of  most  similar 
governmental  investigators,  which  consists  in  inquiring  in- 
to the  more  epic  and  picturesque  manifestations  of  organ- 
ized speculation,  such  as  manipulation;  certainly  the  sub- 
ject of  commission  rates  does  not  possess  the  striking  quali- 
ties which  would  readily  attract  the  attention  of  a  Congres- 
sional investigator.  Any  body  of  investigators,  having 
little  acquaintance  with  a  restricted  portion  of  the  field  it 

1 "  [With  regard  to  stock  exchanges  it  is  recommended]  that  the 
present  rates  of  commission  ...  be  not  now  disturbed." 


138  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE  [158 

is  called  upon  to  cover,  might  easily  pass  over  such  a  point 
as  the  rates  of  commission,  which  would  seem  to  have  little 
importance  to  eyes  that  are  intent  on  the  more  striking  as- 
pects of  Stock-Exchange  speculation. 

Since  the  prevailing  rate  of  commission — exacted  with- 
out distinction  on  transactions  for  either  speculators  or  in- 
vestors— makes  investment  orders  much  less  profitable  and 
desirable  to  brokers  than  are  speculative  orders,  the  prin- 
ciple on  which  revision  of  commission  rates  should  rest 
appears  to  be  that  of  making  rates  of  commission  higher 
on  investment  orders  than  on  orders  of  speculators.  The 
particular  application  of  this  principle  might  consist  of 
lowering  the  existing  prescribed  minimum  rate — 12^  cents 
per  share  of  $100  par  value — for  speculators  in  loo-share 
lots.  However  it  appears  that  the  commission,  computed 
on  the  basis  of  the  rate  named,  possibly  fails  to  cover  the 
expense  where  it  is  exacted  for  the  purchase  and  subsequent 
transfer  of  small  lots  of  stock.  For  smaller  lots,  the  re- 
latively low  charge  of  12^  cents  might  very  well  be  raised 
to  a  point  where  it  would  cover  any  expense  incurred  by  the 
broker  and  yield  him  a  rate  of  profit  comparable  to  that  at 
present  obtained  from  speculative  orders.  In  fact,  the 
system  of  charging  I2>^  cents  on  the  sale  or  purchase  of 
each  share  stands  out  as  quite  illogical  when  the  question 
of  investment  transactions  in  small  lots  is  considered.  Par- 
ticularly in  view  of  the  fact  that  the  actual  sale  and  the 
handling  of  the  securities  involves  as  much  trouble  in  the 
case  of  one  share  as  in  that  of  99  shares,  does  the  un- 
reasonableness of  charging  a  relatively  low  commission 
uniformly  for  each  share  seem  glaring.  So  that  a  revision 
of  the  prescribed  commission  rates  must  tend  to  make  the 
execution  of  investment  orders  more  attractive  to  brokers 
as  compared  with  carrying  out  speculative  orders.  A  re- 
vision should  also  assure  the  broker  a  larger  payment  for 


159]  SUMMARY,  GENERAL  CONCLUSIONS  159 

his  services  on  the  purchase  for  an  investor  of  a  few  shares 
and  on  the  transfer  of  the  stock.  These  two  considerations 
must  be  kept  prominently  in  mind. 

The  London  Stock  Exchange,  during  the  past  few 
months,  has  put  in  force  a  prescribed  scale  of  commissions, 
after  permitting  its  members  for  many  years  to  charge  ac- 
cording to  their  individual  discretions,  which  was  confirmed 
in  its  revised  form,  February  12,  191 3.  The  rates  pre- 
scribed vary  according  to  various  classes  of  securities — 
British  Government,  Indian  Government  Stock,  shares 
transferable  by  deed,  shares  passing  by  delivery^  etc. — but 
our  concern  is  with  the  rates  prescribed  for  shares  in  the 
American  market.  These  rates  are  given  in  the  following 
table,  reproduced  from  the  Economist  of  February  15th, 
1913:' 

SHARES    OF    $50   OR    $I0O    DENOMINATION    DEALT    IN    IN    THE    AMERICAN 

MARKET. 

S.  d. 

Price  $25  or  under    o  6  per  share. 

Over  $25  to  $50  0  9  per  share. 

Over  $50  to  $100 I  o  per  share. 

Over  $100  to  $150 I  6  per  share. 

Over  $150  to  $200 2  o  per  share. 

With  6d.  rise  for  every  $50,  or  portion  thereof,  in  price. 

Of  course  Stock-Exchange  practice  in  London  differs 
from  that  in  New  York  in  that  the  fortnightly  clearing  of 
sales  involves  much  trouble  for  the  broker  in  the  "  carry- 
over ",  when  speculative  commitments  remain  open  during 
the  process  of  clearing.  The  market  prices  of  stocks  there- 
fore enter  more  prominently  into  the  question  of  the  com- 
mission rates  than  they  would  do  in  New  York.  Never- 
theless the  rates  lately  adopted  in  this  case  recognize  the 
fact  that  transactions  in  two  different  securities  may  vary 

2  P.  ZZ2- 


l6o  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE  [i6o 

in  the  cost  of  service  to  the  broker  if  the  respective  mar- 
ket prices  vary  markedly  from  each  other.  And  while  the 
prescribed  minimum  rate  of  one-eighth  of  one  per  cent., 
irrespective  of  market  price  or  of  the  number  of  shares,  in 
New  York  does  not  duly  recognize  the  relatively  slight 
increase  in  the  cost  of  the  broker's  services  with  the  in- 
crease in  number  of  shares  passing  in  a  given  transaction, 
the  following  exceptions  to  the  prescribed  rates  of  the  Lon- 
don Stock  Exchange,  as  they  are  given  below,  accord  with 
that  principle : 

A  broker  may,  at  his  discretion,  when  in  his  opinion  the 
value  of  any  principal's  business  justifies  it,  but  only  in  the 
case  of  a  transaction  in  which  the  consideration  exceeds  £i,ooo, 
charge  that  principal  a  reduced  commission  on  any  transaction, 
but  in  no  case  shall  such  reduced  commision  be  less  than  one- 
half  of  the  minimum  scale  as  laid  down.  .  .  . 

A  broker  may,  at  his  discretion,  when  in  his  opinion  the 
value  of  any  principal's  business  justifies  it,  charge  that  prin- 
cipal a  uniform  commission  of  is.  6d.  per  share  on  shares 
passing  by  delivery  when  the  price  exceeds  £25,^  and  at  his 
Hke  discretion  a  uniform  commission  of  6d.  per  share  on 
shares  dealt  in  in  the  American  Market  on  any  order  for  not 
less  than  50  shares. 

Permission  is  thus  given  brokers,  by  the  above  excep- 
tions, to  charge  reduced  commissions  on  orders  where  the 
consideration  money  exceeds  £1,000  or  to  charge  a  uniform 
commission  of  sixpence  on  each  share  for  transactions  in 
not  less  than  50  American  shares.  It  is  recognized  that 
there  is  a  lower  cost  of  service  per  share  on  large  orders 
than  on  small.     Disregard  of  this  principle  and  also  of  the 

3  On  "  all  other  shares  passing  by  delivery  ",  the  prescribed  minimum 
commission  is  computed  at  the  rate  of  one-quarter  of  one  per  cent,  of 
the  consideration  money. 


l6i]  SUMMARY,  GENERAL  CONCLUSIONS  i6i 

likelihood  that  on  small  orders  the  commission  of  one- 
eighth  of  one  per  cent,  of  the  par  value  may  not  suffice  to 
cover  the  trouble  and  expense  brought  upon  the  broker,  has 
allowed  the  prevalence  of  that  rate  in  New  York  to  con- 
tinue, so  that  orders  for  speculators  on  margin  have  proved 
to  be  much  more  profitable  to  brokers  than  are  investment 
purchases  followed  by  transfer  of  the  stock  to  the  principals 
buying  it. 

Even  before  the  adoption  of  the  official  commission  rates 
in  London,  w^hen  the  rates  were  subject  to  private  contract 
between  the  broker  and  his  principal,  the  higher  cost  of 
services  rendered  investing  purchasers,  as  over  against  the 
cost  of  transactions  on  margin,  was  an  accepted  truism  on 
the  London  Stock  Exchange ;  *  and  it  was  the  practice  to 
charge  a  higher  rate  on  the  former  than  on  the  latter  class 
of  transactions.  Until  the  same  procedure  is  adopted  by 
members  of  the  New  York  Stock  Exchange,  either  by  gen- 
eral voluntary  action  on  their  part,  or  in  compliance  with 
a  formal  rule  of  the  Stock  Exchange,  brokers  will  always 
find  it  to  their  interest  to  have  their  business  largely  made 
up  of  speculative  orders  and  commitments  rather  than  of 
the  relatively  costly  and  troublesome  investment  transac- 
tions. And,  if  ever  speculation  tends  to  extend  its  opera- 
tions far  beyond  the  needs  of  the  investment  demand — 
as  it  did  in  1906 — the  over-speculation  will  probably  meet 
w^ith  no  general  restrictive  action  on  the  part  of  the  brok- 
ers. Nor  will  investment  be  encouraged  so  as  to  relieve 
speculation  of  its  load.  Most  assuredly  the  practice  of  the 
London  Stock  Exchange  in  distinguishing  rates  of  com- 
mission on  speculative  transactions  from  those  for  inves- 
tors has  not  always  availed  to  prevent  over-speculation. 
But  a  revision  of  the  commission  rates  in  New  York,  in 

*  Economist,  July  g,  1904,  p.  1153. 


l62  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE  [162 

accordance  with  the  principle  indicated,  might  lead  the 
brokers,  in  periods  like  that  of  1906  and  1907,  to  encour- 
age investment  more  actively  and  to  incite  speculation  less 
persistently  than  they  have  done  in  the  past  ten  or  twelve 
years.  In  conjunction  with  other  measures,  looking  to  the 
adjustment  of  speculation's  volume  to  that  of  investment, 
a  revision  of  the  commission  rates  or  a  change  in  the  pre- 
vailing practice  might  serve  the  same  purpose  as  those  other 
measures. 

Conditions  call  particularly  for  a  revision  of  rates  of  com- 
mission on  purchases  of  small  lots  of  stock  for  investment 
purposes,  followed  by  transfer  to  the  buyer — and  possibly 
on  sales  of  small  lots.  The  prevailing  rate  of  12J/2  cents 
for  each  share  seems  illogical  in  that  it  possibly  does  not 
cover  the  cost  of  the  service,  when  the  number  of  shares 
purchased  amounts  to  five  or  less.  A  minimum  commis- 
sion, for  example  $2.50,  might  be  charged  on  each  trans- 
action of  this  nature,  where  the  number  of  shares  amounts 
to  twenty  or  less.  Then  the  anomaly  of  brokers'  charging 
generally,  on  transactions  which,  from  the  standpoint  of 
the  common  interest,  are  most  desirable,  a  rate  that  is  not 
remunerative,  would  be  removed.  Or  else  the  revision 
might  take  the  form  of  charging  a  prescribed  rate  for  each 
share — varying  either  according  to  market  price,  as  in  the 
present  scale  of  the  London  Stock  Exchange,  or  on  some 
other  logical  principle — and  also  imposing  a  fee  for  the 
transfer  of  stock,  irrespective  of  the  number  of  shares. 

It  is  most  desirable  that  the  present  discrepancy  in  the 
respective  rates  of  profit  to  the  broker,  arising  from  specu- 
lative and  investment  transactions,  be  overcome.  It  might 
even  be  expedient  to  permit  a  lower  rate  than  one-eighth 
of  one  per  cent,  of  the  par  value,  or  $12.50  for  each  hun- 
dred shares,  to  be  charged  on  speculative  transactions. 
This  might  be  accomplished  by  prescribing,  for  example, 


163]  SUMMARY,  GENERAL  CONCLUSIONS  163 

a  minimum  rate  of  V32  of  one  per  cent,  of  the  par  value, 
or  even  as  little  as  one-sixteenth  of  one  per  cent.  These 
alternative  rates  would  amount  to  $9.37^^  and  $6.25,  re- 
spectively, on  each  transaction  in  one  hundred  shares,  as  over 
against  the  present  amount  of  $12.50.  It  does  not  appear 
that  conditions  in  New  York  imperatively  require  the  lay- 
ing down  of  rates  that  vary  according  to  the  market  price 
of  the  security  involved,  such  as  those  recently  prescribed 
by  the  London  Stock  Exchange.  But  if  the  raising  of 
rates  of  commission  on  investment  orders  should  not  suffice 
to  remove  the  present  wide  variation  in  the  rates  of  profit 
on  orders  for  speculators  and  for  investing  buyers,  some 
permitted  reduction  in  the  rate  of  commission  charged  for 
orders  executed  on  a  margin  basis  might  be  advisable. 

Lowering  the  commission  rate  for  orders  executed  on 
margin  does  not  appear  calculated  to  furnish  any  incite- 
ment to  speculation.  The  difference  between  one-quarter 
Qf  one  per  cent. — the  rate  of  the  commission  on  both  pur- 
chase and  sale  which  are  necessitated  in  a  speculative  trans- 
action— and  say  one-eighth  of  one  per  cent,  would  hardly 
tempt  the  average  outside  speculator,  who  is  usually  led  to 
trade  by  the  prospect  of  gaining  by  a  rise  or  fall  in  price 
of  two  or  three  points  at  least  No  more  probable  is  it 
that  small  investing  purchasers  would  be  repelled  by  the 
minimum  fixed  charge  of  $2.50,  the  amount  we  have  sug- 
gested merely  as  an  example — it  might  be  made  more  or 
less  than  this  particular  amount  to  advantage.  The  most 
important  consideration,  in  revising  the  rates  of  commis- 
sion laid  down  by  the  New  York  Stock  Exchange,  is  to 
shift  the  brokers'  interest  from  that  of  encouraging  specu- 
lation by  every  means  within  their  power  and  of  giving 
investment  orders  only  a  passive  reception,  to  the  point 
where  orders  from  investors  will  present  to  them  some 
measure  of  the  attraction  now  possessed   exclusively  by 


l64  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE  [164 

orders  from  speculators  on  margin  who  deal  in  hundred- 
share  lots. 

An  intelligent  and  logical  revision  of  commission  rates 
might  make  brokers  less  interested  in  arousing  speculation 
to  a  point  where  it  w^ould  far  exceed  the  needs  of  the 
market.  In  order  to  concentrate  the  attention  of  banks  and 
bankers,  and  others  who  are  called  upon  to  finance  the  oper- 
ations connected  with  Stock-Exchange  speculation,  it  might 
be  advisable  to  have  the  offsetting  of  sales  through  the 
Stock  Exchange  Clearing  House  performed  weekly  instead 
of  daily,  as  has  been  done  since  this  method  was  adopted 
in  1892.  This  at  any  rate  would  stimulate  the  quest  of 
banking  devices  in  this  country  by  which  funds  temporarily 
in  bankers'  hands  for  undetermined  periods  might  be  profit- 
ably employed.  Moreover  at  present  speculators  and  brok- 
ers are  wont  to  assume  the  unrestricted  capacity  of  the 
New  York  money  market  to  provide  any  amount  of  call 
funds  which  speculation  may  require  to  carry  its  commit- 
ments over  from  day  to  day.  Weekly  clearings  of  sales 
would,  for  one  thing,  remove  the  advantage  of  ready  con- 
vertibility which  Stock-Exchange  call  loans  possess  in  this 
country  to  the  exclusion  of  other  banking  assets,  by  render- 
ing them  less  capable  of  being  liquidated  any  day,  on  a  few 
hours'  notice,  at  the  lender's  or  borrower's  pleasure.  The 
additional  benefit  might  be  secured  of  causing  all  concerned 
in  Stock-Exchange  operations  —  brokers,  speculators  and 
money  lenders — to  give  more  heed  to  the  possible  demands 
of  speculators,  the  available  facilities  of  the  money  market, 
and  the  adjustment  of  each  to  the  other.  The  question  of 
weekly  or  fortnightly  clearings  of  sales,  as  over  against  the 
present  system  of  daily  clearings,  cannot  be  treated  here 
with  any  thoroughness.  Weekly  clearings  are  suggested 
tentatively  with  particular  regard  to  the  adjustment  of 
speculative  volume  of  operations,  not  only  to  the  investment 


165]  SUMMARY,  GENERAL  CONCLUSIONS  165 

demand,  but  also  to  the  supply  of  call  funds  in  the  money 
market. 

Even  more  important  than  weekly  clearings  would  be  the 
requirement  that  weekly  reports  should  be  made  by  each 
member — firm  or  individual — of  the  Stock  Exchange,  giv- 
ing the  volume  and  nature  of  speculative  commitments  out- 
standing for  customers'  accounts.  And  also  a  detailed  re- 
port of  investment  orders  received  and  executed  each  week 
should  be  made  by  the  members.  The  authorities  of  the 
Stock  Exchange  could  then  publish  the  totals  in  some  de- 
tail, both  of  speculative  commitments  outstanding  among 
its  members  and  also  of  the  investment  orders  received 
and  executed.  The  details  of  individual  members'  busi- 
ness would  not  have  to  be  published  generally,  even  in  sum- 
mary form.  The  present  general  ignorance  of  speculative 
operations  and  also  of  the  volume  and  rate  of  investment 
buying  or  selling,  might  in  this  way  be  dispelled  to  some 
extent.  As  the  situation  now  stands,  the  slightest  scrap  of 
information  on  either  point  would  be  a  valuable  addition  to 
general  knowledge. 

Such  reports  as  are  suggested  might  be  made  to  some 
designated  official  or  standing  committee  of  the  Stock  Ex- 
change and  the  summary  totals  published.  With  these  re- 
ports in  hand,  the  authorities  of  the  Exchange  could  pro- 
ceed intelligently  if  they  ever  took  it  upon  themselves  to 
bring  about  the  adjustment  of  speculation  to  investment 
and  to  enable  the  former  to  '*  anticipate  the  needs  of  the 
market."  The  previous  supineness  of  the  Stock  Exchange 
as  an  organized  body  in  dealing  with  over-speculation  might 
be  excused  on  the  ground  of  insufficient  knowledge.  But 
the  broad  powers  of  the  authorities  over  members  individu- 
ally would  enable  them  with  little  difficulty  to  obtain  the 
information  outlined  above.  This  could  enlighten  them  as 
to  the  necessity  for  repressive  or  regulative  action  on  their 


1 66  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE  [i66 

part  and  guide  them  in  taking  such  action,  should  they 
decide  on  that  course.  Reports  of  the  sort  mentioned  would 
be  more  useful  than  would  be  the  periodic  examinations 
of  individual  brokers'  books,  such  as,  we  are  told,  were 
discussed  in  the  sessions  of  the  Hughes  Committee.^  These 
proposed  examinations,  however,  had  chiefly  the  purpose 
of  maintaining  oversight  of  the  individual  brokers'  finan- 
cial stability.  The  relatively  infrequent  failures  of  brok- 
ers, to  which  defenders  of  the  Stock  Exchange  insistently 
point,  appear  to  make  this  oversight  a  reform  of  slight  ur- 
gency. In  any  case,  examinations  conducted  ''with  the  view 
of  preventing  or  minimizing  failures  ",  would  not  neces- 
sarily aid  in  adjusting  the  volume  of  speculation  to  the  in- 
vestment demand,  which  is  the  purpose  of  the  suggestions 
now  under  consideration. 

Another  recommendation  of  the  Hughes  Committee  that 
was  incorporated  in  its  report — and  also  of  the  Pujo  Com- 
mittee— that  at  least  20  per  cent,  margin  be  required  on 
every  transaction,  would  probably  act  effectively  in  curbing 
over-speculation  to  some  extent.  In  that  it  would  keep  out 
of  the  stock  market  those  who  were  not  able  or  willing  to 
deposit  that  amount  of  margin,  it  should  a  priori  inevit- 
ably reduce  the  volume  of  speculative  commitments  below 
the  point  it  would  reach  if  this  requirement  were  not  en- 
forced. At  times,  as  we  have  seen,  the  volume  of  those 
commitments  far  exceeds  the  investment  demand.  The  re- 
quirement in  question  should  therefore  act  to  correct  any 
tendency  toward  over-speculation  that  might  reveal  itself. 
But  a  careful  inquiry  into  the  relative  degrees  of  sagacity 

^  "  Differences  of  opinion  arose  in  the  committee  as  to  the  advisability 
of  requiring  periodical  examinations  of  the  books  of  brokers,  cor- 
responding to  the  examinations  of  national  banks,  with  the  view  of 
preventing  or  minimizing  failures."— Horace  White,  "  The  Hughes  In- 
vestigation."   Journal  of  Political  Economy,  vol.  xvii,  p.  540. 


167]  SUMMARY,  GENERAL  CONCLUSIONS  167 

possessed  respectively  by  those  who  would  put  up  at  least 
20  per  cent,  margin  and  those  who  would  not  do  so,  might 
be  necessary  in  order  to  determine  the  approximate  amount 
of  benefit  to  be  obtained  from  the  enactment  and  enforce- 
ment of  the  requirement.  In  1906  and  1907,  for  example, 
we  do  not  know  how  many  of  the  speculators  were  forced 
to  liquidate  their  holdings  by  actual  exhaustion  of  the  re- 
sources they  could  devote  to  speculation,  and  how  many 
were  led  to  do  so  by  unwillingness — aside  from  their  ability 
to  deposit  additional  margin — to  stand  by  their  commit- 
ments through  a  prolonged  decline.  Doubtless  the  demand 
for  a  margin  of  at  least  20  per  cent,  would  serve  to  exclude 
a  particularly  undesirable — from  the  standpoint  of  the  com- 
mon interest — type  of  "  shoestring ''  speculator.  For  that 
reason,  it  seems  entirely  worthy  of  adoption;  even  though 
we  do  not  know,  in  times  of  heavy  over-speculation,  just 
what  proportion  of  those  ill-fitted  to  enter  into  stock  mar- 
ket ventures  are  formed  by  speculators  who  are  unable  or 
unwilling  to  put  up  a  margin  of  the  amount  suggested. 

Below  is  a  brief  outline  of  the  measures  which  have  been 
suggested  with  the  aim  in  view  of  restricting  any  tendency 
toward  over-speculation  on  the  Stock  Exchange  in  such  a 
year  as  1906.     These  are  as  follows : 

I.  Revision  of  the  rate  of  commission. 

To  make  investment  orders  more  profitable  to  the 
brokers  than  they  have  been  relatively  to  speculative 
orders,  by 

a.  Prescribing  a  fixed  minimum  charge — covering 
the  broker's  trouble  and  expense — on  investment 
transactions  in  20  shares  or  less;  with  perhaps 
an  additional  charge  for  the  transfer  of  stock  at 
the  buyer's  direction. 

b.  Reducing  the  prescribed  minimum  rate  to  be 
charged  on  speculative  transactions. 


l68  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE  [i68 

c.  Prescribing  minimum  rates  which  would  vary 
with  the  market  price  of  the  securities  involved 
in  a  given  transaction.^ 

d.  Permitting  the  charging  of  lower  rates  on  larger 
orders.*^ 

2.  Weekly  clearings  of  sales  through  the  Stock  Exchange 
Clearing  House. 

To  draw  closer  attention  to  the  volume  of  speculation 
at  a  given  time,  and  to  the  facilities  of  the  money- 
market,  on  the  part  of 

a.  Speculators. 

b.  Brokers. 

c.  Lenders  of  call  money. 

To  lessen  the  advantage  of  Stock-Exchange  call  loans, 
in  point  of  ready  convertibility,  over  other  forms  of 
loans. 

3.  Weekly  reports  by  individual  members  to  the  Stock  Ex- 
change of  outstanding  speculative  commitments  and  of 
investment  orders  received  and  executed. 

Also  publication  by  the  Stock  Exchange  of  summaries  of 
above  reports. 

To  give  information   regarding  relative  volumes  of 

speculation  and  investment  to 

a.  Speculators,  assisting  them  to  conduct  their  oper- 
ations more  intelligently. 

b.  Stock-Exchange  authorities,  enabling  them  to  as- 
certain the  need  for  any  regulative  action  on  their 
part.  Data  to  guide  them  in  any  action  which 
may  seem  advisable. 

4.  Requiring  at  least  20  per  cent,  margin — recommended 
by  the  Hughes  Committee  and  also  by  the  Pujo  Com- 
mittee. 

«  c.  and  d.  are  suggested  by  the  recently  adopted  rules  of  the  London 
Stock  Exchange.  Their  effectiveness  in  view  of  New  York  Stock- 
Exchange  practice  might  be  questioned. 


169]  SUMMARY,  GENERAL  CONCLUSIONS  169 

To  curb  mischievous  over-speculation  by 

a.  Reducing  the  absolute  volume  of  speculation, 
since  it  would  presumably  exclude  from  the  mar- 
ket a  numerous  class  of  speculators. 

b.  Making  the  speculative  class  largely  consist  of 
operators  better  able  to  endure  a  relatively  severe 
decline — however  it  might  affect  their  willing- 
ness to  do  so. 

No  one  of  the  above  measures  alone  could  have  been  de- 
pended on  to  repress  such  overmastering  tendencies  in  the 
direction  of  over-speculation  as  were  revealed  in  the  earlier 
years  of  this  century,  especially  in  1906.  For  instance,  the 
public's  proneness  to  speculate  in  that  year  could  hardly 
have  been  restrained  by  a  body  of  brokers  who,  be- 
cause of  commission  rates  adjusted  to  that  end,  might 
have  been  indifferent  as  to  whether  their  customers 
were  mostly  speculators  or  mostly  investors.  But  had 
a  logical  scale  of  commission  rates  then  prevailed, 
had  weekly  clearings  of  sales  through  the  Stock  Ex- 
change been  the  rule  instead  of  daily  clearings,  had 
the  existing  volume  of  speculative  commitments  and  of 
investment  buying  been  made  known  generally  by  per- 
iodic reports  at  frequent  intervals,  and  had  a  requirement 
of  20  per  cent,  margins  been  rigorously  enforced — it 
seems  highly  unlikely  that  a  volume  of  over-speculation 
for  the  rise,  such  as  was  reached  in  August  and  September, 
1906,  would  have  occurred.  Of  all  four  suggestions,  that 
of  revising  the  commission  rates  seems  most  fundamentally 
important.  But  it  might  not  be  of  much  avail  in  such  a 
year  as  1906  unless  it  were  accompanied  by  the  other  meas- 
ures proposed.  The  prevailing  rate  of  commission — mak* 
ing  speculative  orders  profitable  to  a  much  higher  degree 
than  orders  executed  in  small  lots  of  stock  for  investors — 
will  make  it  to  the  brokers'  interest  to  incite  speculation 


lyo  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE  [lyo 

rather  than  investment,  so  long  as  it  is  maintained.  The 
continued  maintenance  of  this  rate  has  brought  about 
those  developments  in  the  business  of  the  broker  by  which 
the  routine  of  his  operations  and  the  provision  of  facilities 
for  his  customers  are  all  devoted  to  the  encouragement  of 
speculation  and  to  the  economical  and  simple  performance 
of  transactions  in  connection  with  it.  And  so  long  as  this 
rate  persists,  all  that  a  broker  can  do  in  protracted  dull 
periods  is  to  sit  idle  and  wish  for  a  revival  of  speculative 
activity.  Under  this  rate  the  individual  members  will  never 
find  it  to  their  interest  to  assist  in  performing  that  basic 
function  of  the  modern  stock  exchange,  "  directing  the  flow 
of  capital  into  investment  " — that  is,  in  the  stocks  listed 
on  the  Exchange.  An  adjustment  of  the  commission  rates, 
along  the  lines  suggested,  might  make  the  New  York  Stock 
Exchange  a  more  effective  agency  in  this  "  direction  of  the 
flow  of  capital  ",  than  it  has  been  in  recent  years.  Certainly 
in  the  period  studied  its  efficient  performance  of  this  func- 
tion, we  concluded,  was  not  in  evidence  at  all,  except  insofar 
as  it  provided  a  broad  market  wherein  any  investor  might 
buy  or  sell  on  his  own  initiative. 

As  to  the  periodic  reports  on  the  volume  of  speculation 
and  on  the  investment  demand,  it  seems  entirely  desirable 
that  speculators  should  have  some  definite  information  on 
which  they  can  base  their  "  anticipation  of  the  needs  of  the 
market."  In  failing  to  provide  this  information,  the  New 
York  Stock  Exchange  has  not  been  remiss  above  all  other 
institutions  of  that  type.  It  seems  to  be  commonly  ac- 
cepted that  speculators  should  carry  on  their  operations  in 
the  densest  ignorance  of  the  general  needs  of  the  market 
and  of  the  activities  of  other  speculators.  This  apparently 
has  arisen  from  the  attitude  of  the  public  and  of  many 
persons  connected  with  speculation,  which  we  have  shown 
seems   to   govern   objections   to   manipulation,   and   which 


171]  SUMMARY,  GENERAL  CONCLUSIONS  171 

consists  in  regarding  speculation  as  a  game  of  mingled  skill 
and  chance.  To  afford  any  information  regarding  the  ulti- 
mate market  on  which  speculators  depend  for  success,  in 
the  minds  of  many,  would  be  like  permitting  a  whist  player 
to  look  over  his  opponents'  hands  at  the  beginning  of  play. 
Carried  on  without  the  aid  of  the  information  indicated, 
which  could  be  readily  obtained,  speculation  can  never  ad- 
just itself  closely  to  investment  needs,  nor  can  it  "  consist 
in  assuming  the  inevitable  risks  of  changes  in  value."  One 
can  hardly  predicate  "  inevitableness  "  of  risks  that  arise 
from  speculators'  failing  to  equip  themselves  with  the 
knowledge  of  fundamental  conditions  which  is  readily  ac- 
cessible. And  so  long  as  it  is  carried  on  thus  blindly,  specu- 
lation will  never  consist  in  anything  else  than  in  *'  placing 
money  on  the  artifically  created  risks  of  some  fortuitous 
event."  But  if  all  readily  ascertainable  manifestations  of 
the  investment  demand  are  brought  to  their  attention,  specu- 
lators may  intelligently  undertake  the  useful  economic  and 
social  service  of  ''  anticipating  the  needs  of  the  market." 

The  necessity  for  any  regulative  action  to  be  taken  by  the 
Stock-Exchange  authorities  in  the  future,  looking  to  the  ad- 
justment of  speculation  and  investment,  as  a  result  of  the 
fuller  information  they  may  then  obtain,  will  depend  on 
the  strength  of  the  general  inclination  to  speculate.  It 
may  be  uncertain  as  to  how  far  the  publication  of  weekly 
reports,  such  as  have  been  suggested,  and  the  requirement 
of  20  per  cent,  margins  will  restrain  undue  eagerness 
to  venture  into  the  stock  market.  Possibly  developments 
having  no  internal  connection  with  the  Stock  Exchange 
may  prevent  any  such  tendency  from  manifesting  itself 
again  to  the  extent  that  it  did  in  1906.  But  if  a  general 
desire  to  speculate  blindly  on  the  New  York  Stock  Ex- 
change again  seizes  a  numerous  class  in  the  community, 
the  organization  of  that  market  and  the  conduct  of  its 


1^2  SPECULATION  ON  NEW  YORK  STOCK  EXCHANGE  [172 

routine,  as  they  stand  at  present,  will  play  little  part  in 
correcting  or  restraining  the  mischievous  fulfilment  of  that 
desire.  Measures  such  as  those  that  have  been  suggested, 
and  possibly  some  others,  should  make  the  New  York  Stock 
Exchange  an  efficient  agency  in  ''  directing  the  flow  of 
capital  into  investment  " ;  and  prices  registered  in  the  course 
of  operations  carried  out  by  speculators  having  some  knowl- 
edge of  their  ultimate  market,  might  very  possibly  serve  to 
"  discount  "  future  conditions. 


APPENDIX 


I. 

NUMBER  OF  SHARES  SOLD  ON  THE  NEW  YORK  STOCK  EXCHANGE,  EACH  MONTH,  1900 

TO  1912,  INCLUSIVE. 

igoo 

tgoi 

,,0. 

'903 

'904 

'905 

tqob 

'907 

,go8 

'909 

igto 

igii 

igti 

Jan"«y 

9.843.716 

30,285,055 

14,779,223 

16,001,222 

12,262,624 

20,792,558 

38,512,548 

22,702,760 

16,594.895 

17,275,500 

24,538,649 

10,416,526 

10,906,138 

February 

10,195.392 

21,902,822 

12,986,943 

10,922,017 

8,787,259 

25,239,088 

21,699,800 

16,470,972 

9.839.706 

i2,337.'99 

16,012,626 

10,194,217 

7,086,544 

March 

14,446,782 

27,060,968 

11,957.409 

15.095.306 

11,440,956 

29,138,838 

19,467,684 

32,208,525 

'5.939.255 

'3.650,595 

14,988,179 

6,823,868 

14,552,052 

April 

14,772,973 

41,719,086 

26,567,743 

12,293,058 

8,205,529 

29,298,456 

24,330,9'9 

19,235.652 

11,648,123 

19,055,618 

14,089,639 

5.639.350 

'5.959,338 

Mav     

9,519,473 
7.308,687 
6,230,493 

35,292,203 
19,795,612 
16,024,668 

'3.532,353 
7,834,768 
16,352,231 

.2,467,588 
'5.396.741 
'4.903.758 

5,290,110 
4,972,804 
12,462,394 

20,517,560 
12,576,469 
'3,273,655 

24,026,049 
20,340,391 
16,346,221 

15,827,245 
9,749,4'5 
'2,811,354 

20,975,022 
9.652,437 
'3.857.563 

16,495.230 
20,322,230 
12,806,965 

11,9' 8,978 

","5.578 

'3,662,747 

July 

■14,254,713 

S.476.559 

7. '58.324 

August 

4,020,654 

10,772,021 

14,314,627 

14.370,943 

12,474,789 

20,205,735 

31,804,816 

15.561.583 

18,881,265 

24,637,783 

10,392,788 

'4,994.533 

8,952,358 

September  

5,169,966 

13,990,195 

20,972,253 

10,795.453 

18,767,264 

16,012,044 

26,018,270 

12,223,541 

17,582,499 

19,981,675 

7,673,529 

'7.39S.9S7 

10,107,204 

October 

10,895,083 

14,036,082 

16,361,124 

12,896,893 

32,574,449 

17,674,807 

21,894,130 

'7,333,793 

14,266,901 

2i,739,5'4 

13,452,38' 

10,936,901 

14,166,896 

November 

22,565,336 

18,314,962 

17,126,062 

'0,730,979 

31,981,066 

26,823,550 

19,400,130 

9,677,494 

24,966,326 

18,769,870 

10,713.469 

'4.9'9,486 

8,72S,3'7 

December 

23,411,629 

16,750,985 

15,718,667 

15,228,143 

28,092,821 

31,528,396 

20,457,052 

12,636,490 

23,002,354 

17,560,015 

9,822,240 

9.055.883 

12,631,786 

II.     PRICES  OF  LEADING  SPECULATIVE  STOCKS  ON  THE  NEW  YORK  STOCK  EXCHANGE,  ON  THE  FIRST  OF  EACH  MONTH,  SEPTEMBER,  1904,  TO  MARCH,  1907,  AND  ON  MARCH  29,  1907. 


Atchison 

Bait.  &  O 

Reading 

South.  Pac 

Union  Pac 

Industrials. 
Amalgam.  Cop. 
Steel,  common. 


Sept.  I, 


Oct.  I. 'Nov.  I.Dec. 


I  I  I  I  '  I  i  I 

fan.  3.  Feb.  i.  Mar.  i.  Apr.  I.  May  i.  June  I.  July  I.Aug.  i.jSept.  i, 


83Ji 

86 

88>^ 

90>^ 

93>^ 

9^% 

•05% 

69 

73 

78M 

80 

57%     61 

67% 

65M 

io2?i    1 10}^ 

1 

Ii6>^ 

l«4>^ 

1 
58%     (>9% 

81 

72 

18% 

20>^ 

i^Vs 

30% 

I02>^ 

88J^ 
66% 


74% 
3« 


89  88 

107?^  io8>^ 

95  94% 

70%  (>iyl   to% 

•33  '30%    ii9>^ 


'04j^ 
901^ 


76?^     80^     78>^ 
34%     35%     30% 


8oi^|  83M  87>^j  9°% 
io8>^!  113%  ii4%i  "1% 
93M    100    i   '05^^  "6 


62%     64         6sJi 
123       1271^    131 


8o%|     82j^ 
27>il     31% 


65% 
'31% 


84%     82Ji 
35%     36% 


Oct.  I.Nov.  I.  Dec, 


90>^      88^     87 


"2% 
123% 
69>^ 


II2>^ 
I28>^ 

70% 


I 
84%     83% 

38>^!    ; 


"2>^ 

137 

68)^ 
135% 

90>^ 
37}^ 


1906. 


Jan.  2.:Feb.  I. 


89J41     93% 

"3)^    115%' 

i 

'39       '4')^ 


66)i 
'S0>^ 


69% 

'S5>i: 


Mar.  I. 

Apr.  I. 

89>^ 

94% 

"0% 

112 

'36)€ 

'37 

65M 

69>^ 

'49^2 

'57)i 

I07>^ 

'09>^ 

40% 

42 

May  I.June  I.'  July  2.  Aug.  I. 'Sept. I.  Oct.  I.Nov.  I 


89%!  89% 
i07%|  ^o^% 
123K 

64% 
H7H 

1041^ 
4" 


'40% 

121K 

66%     67 

150  ■ 

143 

108 

97>^ 

40% 

34% 

88         92% 
116%'  121 
'3'K 
74% 


io6>^ 

"7%j 

'36;^ 

90% 
I 
'53>i|  '9'>i 


i02>^j  109% 
4'>^     46)^ 


'05%  100% 

'23%  uSH 

93%  90K 

'83%  '80% 


'"% 
45% 


'09% 
46 


Dec. 


i04J^ 
"9% 
'47% 
94% 
187 

"3% 
47% 


Jan. 


'04% 

I20>^ 

'34% 
93>^ 
180 

"5% 
48%] 


Feb.  I 

Mar.  I. 

'0'% 

102% 

"6% 

"0% 

122^ 

"5% 

93% 

9'% 

'72% 

■7'% 

"2% 

"0% 

44% 

44% 

Mar.  29. 


89% 
97% 

'04% 
80% 

'34% 

88% 
35% 


tCaXmnbin  WiuivRvsitvi 
in  tlte  ©its  0f  l^«ttr  '^atU 

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VOLUME  XXVIII,  1907.    664  pp.    Price,  cloth,  $4.00. 

1.  DeWltt  Clinton  and  the  Origin  of  the  Spoils  System  in  New  York. 

By  Howard  Lee  McBain,  Ph.  D.     Price,  lx.50. 

2.  The  Development  of  the  Legislature  of  Colonial  Virginia. 

By  Elmer  1.  Miller,  Ph.D.     Price,  fi.50. 
8.  The  Distribution  of  Ow^nership.     By  Joseph  Harding  Underwood,  Ph.D.     Price,  $1.50. 

VOLUME  XXIX,  1908.    703  pp.    Price,  cloth,  $4.60. 

1.  Early  New^  England  Towns.  By  Anne  Bush  MacLhar,  Ph.D.    Price,  $1.50, 

2.  New  Hampshire  as  a  Royal  Province.  By  William  H.  Fry,  Ph.D.    Price, $3.00. 

VOLUME  XXX,  1908.    712  pp.    Price,  cloth,  $4.60;  paper  covers,  $4.00. 

The  Province  of  New  Jersey,  1664—1738.  By  Edwin  P.  Tanner,  Ph.D. 

VOLUME  XXXI,  1908.    676  pp.    Price,  cloth,  $4.00. 

1.  Private  Freight  Cars  and  American  Railroads. 

By  L.  D.  H.  Weld,  Ph.D.     Price,  I1.50. 

2.  Ohio  before  1850.  By  Robert  E.  Chaddock,  Ph.D.     Price,  Ji.so. 

3.  Consanguineous  Marriages  In  the  American  Population. 

By  George  B.  Louis  Akner,  Ph.D.     Price,  75  cents. 

4.  Adolphe  Quetelet  as  Statistician.  By  Frank  H.  Hankins,  Ph.D.    Price,  ^1.35. 

VOLUME  XXXII,  1908.    706  pp.    Price,  cloth,  $4.60;  paper  covers,  $4.00. 

The  Enforcement  of  the  Statutes  of  Laborers.  By  Bertha  Haven  Putnam,  Ph.D. 

VOLUME  XXXIII,  1908-1909.    636  pp.    Price,  cloth,  $4.60. 

1.  Factory  Legislation  in  Maine.  By  E.  Stagg  Whitin,  A.B.    Price,  |i.oo. 

2.  *  Psychological  Interpretations  of  Society, 

By  Michael  M.  Davis,  Jr.,  Ph.D.     Price,  ;f2.oo. 

8.  *An  Introduction  to  the  Sources  relating  to  the  Germanic  Invasions. 

By  Carlton  Huntley  Hayes,  Ph.D.     Price,  |i. so. 


VOLUIVIE  XXXIV.  1909.    628  pp.    Price,  cloth,  $4.50. 

1.  [89]  Transportation  and  Industrial  Development  In  the  Middle  West. 

By  William  F.  Gkphart,  Ph.D.    Price,  $2.o«. 
ie.  [90]  Social  Reform  and  the  Reformation. 

By  Jacob  Salwyn  Schapiro,  Ph.D.     Price,  $i.*s. 
8.  [91]  Responsibility  for  Crime.  By  Philip  A.  Parsons,  Ph.D.     Price,|i.5o. 

VOLUME  XXXV,  1909.    568  pp.    Price,  cloth,  $4.50. 

1.  [93]  The  Conflict  over  the  Judicial  Powers  in  the  United  States  to  1870. 

By  Charles  Grove  Haines,  Ph.D.     Price,  J1.50. 
8.  [93]  A  Study  of  the  Population  of  Manhattan vllle. 

By  Howard  Brown  Woolston,  Ph.D.     Price,  ^1.25. 

3.  [94]  *  Divorce:  A  Study  In  Social  Causation. 

By  James  P.  Lichtenbergbr,  Ph.D.     Price,  $1.50. 

VOLUME  XXXVI,  1910.    542  pp.    Price,  cloth,  $4.00. 

1.  [951  *  Reconstruction  in  Texas.      By  Charles  William  Ramsdell,  Ph.D.     Price  $2.50. 
8.  [961  *  The  Transition  in  Virginia  from  Colony  to  Commonwealth. 

By  Charles  Ramsdell  Lingley,  Ph.D.     Price,  ^i  50. 

VOLUME  XXXVII,  1910.    606  pp.    Price,  cloth,  $4.50. 

1.  [97]  Standards  of  Reasonableness  in  Local  Freight  Discriminations. 

By  John  Maurice  Clark,  Ph.D.     Price,  |i.as. 
S.  [98]  Legal  Development  in  Colonial  Massachusetts. 

By  Charles  J.  Hilkey,  Ph.D.     Price,  Ji. 25. 
8.  [99]  *  Social  and  Mental  Traits  of  the  Negro. 

By  Howard  W,  Odum,  Ph.D.     Price,  ^2.00. 

VOLUME  XXXVin,  1910.    463  pp.    Price,  cloth,  $3.50. 

1.  [1001  The  Public  Domain  and  Democracy. 

By  Robert  Tudor  Hill,  Ph.D.     Price,  $2.00, 

8.  [101]  Organismic  Theories  of  the  State. 

By  Francis  W.  Cokhr,  Ph.D.     Price,  ^1.50. 

VOLUME  XXXIX,  1910-1911.    651  pp.    Price,  cloth,  $4.50. 

1.  [103]  The  Making  of  the  Balkan  States. 

By  William  Smith  Murray,  Ph.D.     Price,  $1.50. 

9.  [103]  Political  History  of  New  York  State  during  the  Period  of  the  Civil 

War.  By  Sidney  David  Brummkr,  Ph.  D.     Price,  3.00. 

VOLUME  XL,  1911.    633  pp.    Price,  cloth,  $4.50. 

1.  [104]  A  Survey  of  Constitutional  Development  In  China. 

By  Hawklinu  L.  Yen,  Ph.D.     Price,  ^i.oo. 
«.  [105]  Ohio  Politics  during  the  Civil  War  Period. 

By  Ghorgk  H.  Porter,  Ph.D.     Price,  $1.75. 
8.  [106]  The  Territorial  Basis  of  Government  under  the  State  Constitutions. 

By  Alfred  Zantzinger  Rehd,  Ph.D.     Price, $1.75. 

VOLUME  XLI,  1911.    514  pp.    Price,  cloth,  $3.50;  paper  covers,  $3.00. 

[107]  New  Jersey  as  a  Royal  Province.  By  Edgar  Jacob  Fisher,  Ph.  D. 

VOLUME  XLII,  1911.    400  pp.    Price,  cloth,  $3.00 ;  paper  covers,  $2.50. 

[108]  Attitude  of  American  Courts  In  Labor  Cases. 

By  (jeorge  Gorham  Groat,  Ph.D. 

VOLUME  XLIII,  1911.    633  pp.    Price,  cloth,  $4.50. 

1.  [109]  *Industrial  Causes  of  Congestion  of  Population  in  New  York  City. 

By  Edward  Ewing  Pratt,  Ph.D.     Price,  f2.oo. 

2.  [110]  Education  and  the  Mores.  By  F.  Stuart  Chapin,  Ph.D.    Price,  75  cents. 
8.  [Ill]  The  British  Consuls  in  the  Confederacy. 

By  Milledge  L.  Bonham,  Jr.,  Ph.D.    Price,  $2.00 

VOLUMES  XLIV  and  XLV,  1911.    745  pp. 
Price  for  the  two  volumes,  cloth,  $6.00  ;  paper  covers,  $5.00. 

[112  and  118]  The  Economic  Principles  of  Confucius  and  his  School. 

By  Chen  Huan-Chang,  Ph.D. 

VOLUME  XLVI,  1911-1912.    623  pp.    Price,  cloth,  $4.50. 

1.  [114]  Tlie  Klcanliun  Socialists.  By  Esther  Lowenthal,  Ph.D.     Price,  Ji.oo- 

a.  [ll.'j]  Ibrahim  I'asha,  Grand  Vizier  of  Suleiman,  the  Magtiiflcent. 

By  Hester  Donaldson  Jenkins,  Ph.D.     Price,  $i.oo. 
JJ.  [116]  *Tho  T^abor  Movement  in  France.    A  Study  of  French  Syndicalism. 

By  Louis  Levinb,  Ph.D.     {Not  so/d  separately.) 

4.  [117|*A  Hoosler  Villaere.  By  Newell  Leroy  Sims,  Ph.D.     Price,  gi. 50. 


VOLUME  XL VII.  1912.    544  pp.    Price,  cloth.  $4.00. 

1.  [118]  The  Politics  of  Michigan,  1866-1878. 

By  Harribttb  M.Dilla,  Ph.  D.    Price,  ^2.00. 

S.  [119]  *The  United  States  Beet-Snerar  Industry  and  tlie  Tariff. 

By  Roy  G.  Blakhy.  Ph.D.    Price,  |«.cxj. 

VOLUME  XLVin,  1912.    493  pp.    Price,  cloth,  $4.00. 

1.  [ISO]  Isldor  of  Seville.  By  Ernest  Brkhaut,  Ph.  D.    Price.  $2.00. 

9.  nsi]  Progress  and  Uniformity  In  CMld-Liabor  Lieglslatlon. 

By  William  Fielding  Ogburn,  Ph.D.    Price,  ^1.75. 

VOLUME  XLIX.  1912.    592  pp.    Price,  cloth,  $4.50. 

1.  [132]  Brltlsli  Radicalism  1701-1797.  By  Walter  Phklps  Hall.    Price,  $2.00. 

9,  [1S3]  A  Comparative  Study  of  tlie  Law  of  Corporations. 

By  Ari'hur  K.  Kuhn,  Ph.D.    Price,  |i. 50. 

3.  [184]  *Tlie  Negro  at  Work  In  New  York  City. 

By  George  E.  Hatnbs.  Ph.D.     Price, $1.25. 

VOLUME  L,  1912.    481pp.    Price,  cloth,  $4.00. 

1.  [135]  *Tlie  Spirit  of  Chinese  Philanthropy.       By  Yai  Yub  Tsu,  Ph.D.    Price,  $i.oo. 

2.  [136]  *The  Allen  in  China.  By  Vi.  Kyuin  Wellington  Koo,  Ph.D.    Price,  $2.50. 

VOLUME  LI,  1912.    4to.  Atlas.    Price :  cloth,  $1.50;  paper  covers.  $1.00. 

1.  [137]  The  Sale  of  Liquor  in  the  South. 

By  Leonard  S.  Blakky.  Ph.D. 

VOLUME  LII,  1912.    489  pp.    Price,  cloth,  $4  00. 

1.  [138]  *Provlnclal  and  Local  Taxation  in  Canada. 

By  Solomon  Vinbbkrg,  Ph.D.  Price,  $r.5o 

3.  [139]  *The  Distribution  of  Income. 

By  Frank  Hatch  Strbightoff,  Ph.D.  Price,  Jr. 50. 

3.  [ISO]  *The  Finances  of  Vermont.  By  Frederick  A.  Wood,  Ph.D.  Price,  $1  00. 

VOLUME  LIII,  1913.    789  pp.    Price,  cloth,  $4.50;  paper,  $4.00. 

1131]  The  Civil  War  and  Reconstruction  In  Florida.         By  W.  W.  Davis,  Ph.D. 

VOLUlilE  LIV,  1913.    604  pp.    Price,  cloth,  $4.50. 

1.  [133]    *  Privileges  and  Immunities  of  Citizens  of  the  United  States. 

By  Arnold  Johnson  Lien,  Ph.  t».     Price,  75  cents. 
3.  [133]    The  Supreme  Court  and  Unconstitutional  Leelslatlon. 

By  Blaine  Free  Mookb,  Pn.D.     Price,  $1.00. 

3.  [134]  •Indian  Slavery  In  Colonial  Times  within  the  Present  Limits  of  the 

United  States.  By  Almon  Wheeler  Laubbr,  Ph.D.     Price,  $3.cx>. 

VOLUME  LV,  1913.    665  pp.    Price,  cloth,  $4.50. 

1.  [136]    *A  Political  History  of  the  State  of  New  York. 

By  Homer  A.  Stebbins,  Ph.D.     Price,  $4.00. 
3.  [  136)    *The  Early  Persecutions  of  the  Christians. 

By  Leon  H.  Canfibld,  Ph.D.     Price,  I1.50. 

VOLUME  LVI,  1913-1914 

1.  [137]  Speculation  on  the  New  York  Stock  Exchange,  1904-1907. 

By  Algernon  Ashbukner  Osboknk.     Piice,  $1.00. 


The  price  for  each  separate  monograph  ia  for  paper-couered  copies;  separate  monographs  marked*,  can 
be  supplied  bound  in  cloth,  for  60c.  additional.    AH  prices  are  net. 

The  set  of  fifty-five  volome*,  coyering  monoerapbs  1-136,  is  offered,  bonnd,  for  $180:  except  that 
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Volumes  111,  IV  and  XXV,  can  now  be  supplied  only  in  connection  with  complete  sets. 


For  further  information,  apply  to 

Prof.  EDWIN  R.  A.  SELIGMAN,  Columbia  University, 

or  to  Messrs.  LONGMANS,  GREEN  &  CO.,  New  York. 
London:  P.  S.  KING  &  SON,  Orchard  House.  Westminster. 


